The failure of world oil producers to reach a deal on a production freeze in Doha, Qatar, shouldn’t have been a major surprise. But the way the Sunday talks collapsed is underlining notions of a significant shift, with Saudi Arabia’s 30-year-old deputy crown prince, Mohammed bin Salman, playing a dominant role in setting policy for the world’s largest oil exporter.

Oil futures trimmed sharp declines but remain lower, with the U.S. benchmark futures contract ending down 1.4%, while Brent futures settled off 0.4%.

See:Here’s why Doha failed to deliver an oil deal.

Prince Mohammed, who serves as the kingdom’s defense minister, appeared to win the day on Sunday, according to some analysts. Previously, Saudi oil minister Ali al-Naimi had left the door open to an agreement without the participation of Iran, whose unwillingness to strike a deal wasn’t a surprise. In the end, it was the prince’s hard-line call that prevailed.

On the eve of the meeting, Prince Mohammed told Bloomberg that Iranian participation was a must, and warned that the Saudis were capable of ramping up production by another one million barrels a day. Iran, of course, had no intention—nor had it signaled otherwise—of participating in a freeze, focusing instead on pushing production back to presanction levels.

© Provided by MarketWatch Mohammed bin Salman, Saudi Arabia’s 30-year-old deputy crown prince

In a Monday note, commodity analysts led by Helima Croft at RBC Capital Markets, deemed Prince Mohammed the “ultimate disrupter.”

The royal’s stance put Saudi Arabia at odds with its key Gulf allies, such as Qatar and Kuwait, “which normally stand shoulder to shoulder with the Kingdom on oil policy,” they wrote. It was Iran’s refusal to budge that likely hardened the Saudi resolve to stick to its guns, the RBC analysts said, leaving the assembled oil ministers to try their best to put a positive spin on the outcome.

Phil Flynn, senior market analyst at Price Futures Group, said the Sunday outcome was a “sign that the politics of OPEC have changed forever.” The 80-year-old Naimi, who has served as oil minister for nearly two decades, had long focused on ensuring Saudi Arabia’s reputation as a reliable supplier. Naimi’s focus on stable oil markets had once led him to be called “the Alan Greenspan of OPEC.”

Not everyone is convinced that there has been a major shift in Naimi’s role. The Saudis, after all, had made relatively clear that the odds of a deal were low unless Iran and others went along, said Sarah Ladislaw, director of the energy and national security program at the Center for Strategic and International Studies, a Washington think tank.

Prince Mohammed’s rising profile, however, does show that there has been “a fairly significant shift in how Saudi Arabia”is thinking about the role of oil and the shape of its economy going forward,” she said.

Prince Mohammed earlier this year this year said Riyadh was weighing selling part of state-owned Saudi Aramco, the world’s largest oil producer, in an initial public offering—a move seen as part of a broader reform of the kingdom’s economy.

Flynn, however, sees the prince’s ascendancy as a sign the Saudis are no longer reluctant to use oil as a diplomatic weapon. Indeed, many analysts view Saudi Arabia’s intensifying geopolitical rivalry with Iran as the motivating factor behind Riyadh’s hard line.

Read: This nasty oil rivalry is why a genuine output freeze is a long shot.

“We can no longer look to Saudi Arabia as a reliable supplier in times of crises as we have in the past. It seems this new crew of princes are more aggressive, more abrupt, less interested in oil politics and more interested in sending a message to their enemies,” Flynn wrote.

In other words, Prince Mohammed isn’t the same as the old boss. And the rest of the world will need to adjust accordingly.

William Watts is MarketWatch's deputy markets editor, based in New York.

article link

Investors awaiting Sunday’s meeting of major oil producers in Doha are eyeing signs of a pact that could freeze oil production in a bid to stabilize prices. But they are also mindful of a political dynamic that threatens to derail an agreement: Saudi Arabia and Iran don’t like each other.

Saudi Arabia has said any deal would have to include its neighbor across the Persian Gulf. Iran’s oil minister called that idea a “joke” in February. Since then, there’s been plenty of jockeying, and investors and traders appear to be betting that some sort of deal will get done.

Image Credit AFP/Getty Images Hidden except last slide

Caption inside of wrapper on slideshow media types

Caption outside of wrapper for normal article images

But many observers think it will have to happen without Iran, which aims to boost output as world powers lift sanctions that have curtailed its oil exports and crippled its economy for years. The rivalry between Tehran and Riyadh, which have fought over oil prices and virtually everything else for decades, is a complicating factor.

“This is a historic rivalry that started long before oil was discovered and will last long after oil is unimportant,” said Matt Bey, energy analyst at Austin, Texas-based risk analysis firm Stratfor.

A decadeslong rivalry extends into today

The meeting comes as oil futures have rallied sharply. Brent crude LCOM6, -0.12% the global benchmark, is up nearly 12% since the end of March. The U.S. benchmark CLK6, +0.13% is up more than 9% for in April, trading above $40 a barrel after hitting a nearly 13-year low at $26.21 in mid-February.

Still, oil remains far off its mid-2014 highs well above $100 a barrel for both benchmarks.

Meanwhile, Saudi Arabia and Iran are mired in a number of proxy battles across the Middle East. On Monday, fighting marred the start of a cease-fire in Yemen between a Saudi-backed coalition and Houthi rebels Riyadh sees as a proxy for Iran.

The violence extended tensions that date back to 1979, when the countries became fierce rivals following the overthrow of Iran’s Shah in the Islamic Revolution.

Image Credit AFP/Getty Images Hidden except last slide

Caption inside of wrapper on slideshow media types

Caption outside of wrapper for normal article images

Before that, the U.S. government’s “Twin Pillars” policy had sought to build up both Iran and Saudi Arabia, and the countries were wary allies. Iran — by virtue of its larger population, then-larger oil revenues and more powerful armed forces — served as the region’s de facto “policeman” in the 1970s, said Mohsen Milani, professor of politics at the University of South Florida in Tampa.

In the wake of the Shah’s overthrow, Iran vowed to export revolution to the Arab world. Tehran became a foe of the U.S., while Saudi Arabia remained Washington’s ally.

In 1980, Saudi Arabia backed Iraq in the devastating Iran-Iraq War. The end of the war in 1988 saw something of a rapprochement, but the U.S. invasion and occupation of Iraq in 2003 renewed tensions, Milani said, as the fall of Saddam Hussein removed what the Saudis had considered a bastion against Iranian influence in the region.

Iran’s nuclear deal is another source of unease for the Saudis, who fear that a thawing of relations between Washington and Tehran will weaken U.S. reliance on Riyadh and diminish the kingdom’s strategic value to Washington. Since the nuclear deal, Saudi suspicions of U.S. motives “reached a level of hysteria,” underlining Riyadh’s determination to pursue a more independent and assertive foreign policy, Milani said.

Saudi Arabia and Iran are also supporting opposite sides in Syria’s bloody civil war, where Iran is a close ally of Syrian ruler Bashar al-Assad. And Saudi Arabia earlier this year executed a prominent Shiite cleric, triggering anti-Saudi protests across Iran. Saudi Arabia subsequently broke off diplomatic relations with Tehran after protesters attacked the Saudi embassy in there.

So what does all that have to do with oil? It depends on who you ask.

Saudi Arabia, Iran have a history of oil price opposition

The Saudis and Iran have often been on opposite sides of price debates. In the 1980s, Iran pushed hard for higher oil prices against Saudi resistance.

Today, some observers contend that the Saudi-led decision by the Organization of the Petroleum Exporting Countries to flood the world with oil, while aimed primarily at knocking higher-cost U.S. shale producers out of business, is also an effort by Riyadh to deny Iran market share as it returns to the global marketplace.

Image Credit Hidden except last slide

Caption inside of wrapper on slideshow media types

Caption outside of wrapper for normal article images

U.S. shale producers and other non-OPEC producers are the primary target of the Saudi-led price war, according to Stratfor’s Bey. But keeping pressure on oil prices might also have the collateral benefit — from the Saudi perspective — of applying “financial pain to Iran,” by undercutting Tehran’s ability to support rebel activities in Yemen and Syria, Bey said.

Meanwhile, Iran has its own revenue-maximizing reasons to reject any proposal that would force it to curtail its ambitious plan to boost production to pre-sanction levels of 4 million barrels a day.

The International Monetary Fund projects Iran’s economy will see real growth of 4.3% in the current fiscal year after stalling in 2015. Analysts at credit insurer Coface note that Iranian authorities are penciling in foreign direct investment of $50 billion this year, up from just $2.1 billion in 2014.

Iran holds the world’s second-largest proved oil reserves, but it saw production fall after U.N. export sanctions over its nuclear program were tightened. Between 2011 and 2013, production fell from almost 3.7 million barrels a day to 2.7 million, according to the U.S. Energy Information Administration.

“Increasing exports and foreign direct investment remain at the center of [Iran’s] economic policy,” said Seltem Iyigun, an Istanbul-based economist at Coface. “I believe Iran and the current government would take the risk and push oil production and oil exports.”

Some observers expect the Saudis and the Iranians to put aside their geopolitical rivalry when it comes to economic matters. The Saudis are facing substantial fiscal pain of their own thanks to the collapse in oil prices, and have implemented austerity measures to deal with the toll — even floating the possibility of selling a chunk of its crown jewel, the state-owned Saudi Aramco oil company, in an initial public offering.

While Saudi Arabia is attempting to hold the feet of U.S. shale producers to the fire, those analysts are skeptical that Riyadh sees the oil price collapse as an opportunity to inflict pain on Iran.

“I just don’t believe in the long run the Saudis would ever win that fight in terms of who would take more pain,” said Gary Ross, executive chairman of PIRA Energy Group. “I don’t think there’s any question that the Iranians can take more pain than the Saudis, and the Saudis know that.”

Disparate interests drive the countries’ views

The International Monetary Fund estimates that Iran’s fiscal break-even price — the price of oil that would balance the country’s budget — stands at $70.40 a barrel in 2016 versus $95.80 a barrel for Saudi Arabia. Brent crude last traded above those levels in mid-2014.

Iran’s reluctance to go along with an oil freeze is no surprise to analysts who note that Iranian President Hassan Rouhani has put a heavy emphasis on rebuilding the economy. Iran’s average break-even price for oil — the price at which a barrel of oil covers the cost of getting it out of the ground — is seen in the teens.

Failing to deliver would undermine Rouhani heading into next year’s elections, Bey said.

Besides, desperate for revenue and foreign exchange, Iran has every incentive to pump despite depressed prices.

“Every extra barrel [Iran is] able to produce and export is money that it wasn’t seeing three months ago when it had sanctions applied on it,” said Matthew Smith, director of commodity research at ClipperData in Louisville, Ky. “Even if the price is $20 or $30 a barrel, it’s still extra revenue for them because they’re such a low-cost producer. And they’ve been cash-starved for so long.”

long.”

Image Credit Hidden except last slide

Caption inside of wrapper on slideshow media types

Caption outside of wrapper for normal article images

While some analysts doubt the Saudis see low oil prices as an effective way to punish Iran given Riyadh’s own fiscal woes, there are signs that both countries are engaged in a sharp-elbowed fight for market share as Iran begins ramping up production.

In February, just before sanctions began to be lifted, Saudi Arabia sold a “huge amount” of oil in China, which is typically Iran’s top destination for crude, according to Smith.

Saudi Arabia shipped 1.38 million barrels a day to China in February, slightly below its record of 1.39 million in February 2012, according to Reuters. In the last month, Iran has ramped up the volume of crude shipped into India while Saudi volume has dipped, Smith said.

In addition, Riyadh has reportedly impaired Iran’s ability to ship oil, particularly to Europe, by banning vessels transporting Iranian crude from entering ports in Saudi Arabia and Bahrain, noted Patrick Dennis, lead Middle East economist at Oxford Economics.

The combination of geopolitical and economic conflicts between the Saudis and Iran are among the reasons many analysts are viewing the Doha meeting with some skepticism. Without Iran on board, many say, maintaining discipline will be difficult.

Some analysts see Saudi Arabia trying to have it both ways. “They’re saying we’ll consider cutting production, but Iran has to take part, too,” Smith said. “So, in that way, they’re sort of deflecting blame” for overproduction toward Iran.

That might be part of a broader shift, wrote Dennis at Oxford Economics. After all, Russia — a long-standing ally of Iran and Syria’s Assad regime — has led the charge alongside Saudi Arabia for a freeze. An agreement might help the Saudis by shifting blame for low oil prices to Tehran while strengthening its ties to Russia and Venezuela, Iran’s allies, he said.

“Russia’s interest in the region means it is important for Saudi Arabia to develop relations to help solve the Syria war and, above all, to influence Tehran, notably in controlling its oil production increase,” Dennis said.

This story was first published on April 14, 2016.

article link