Oil and Gas

Saudi Arabia: Markets will handle Iran oil boost

Matt Clinch; Reporting by Steve Sedgwick
Saudi 'welcomes' shale oil: Oil minister
Saudi 'welcomes' shale oil: Oil minister

Saudi Arabia's oil minister has downplayed the threat of oversupply in oil markets despite Iran looking to ramp up significantly its production in 2014 as sanctions are lifted from the country.

At a bustling meeting of the Organization of the Petroleum Exporting Countries (OPEC) in Vienna on Wednesday, Iranian Oil Minister Bijan Namdar Zangeneh, told CNBC that the country was "technically ready" to start producing 4 million barrels per day (bpd) as soon as sanctions stopped, which would be around the middle of 2014.

He added that other producers would therefore have to moderate their production to maintain capacity and prices but didn't want to name producers that he feels should be looking to curb output. Namdar Zangeneh told Iranian reporters ahead of the OPEC meeting that Iran will produce oil at this level "under any circumstances" -- even if oil prices dropped to $20 a barrel, according to Reuters.

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Ministers rolled forward until June an agreement to hold their output near 30 million barrels daily for the 12 member countries, but analysts are focused on reaction from other nations after comments from Iran.

In response to the Iran's proposed production hike, Ali al-Naimi, Saudi Arabia's highly influential oil minister said he was not worried about Iranian oil oversupplying the market but stressed that if prices decreased it would not only be OPEC that would be affected.

"The market will accommodate it," he told CNBC at the meeting. He also rejected suggestions that Iraq had used Iranian sanctions to increase its own production, saying media outlets had made "assumptions".

Iran - the world's fourth biggest oil-producer according to the International Energy Agency (IEA) - and six world powers reached a breakthrough agreement in November to moderate Tehran's nuclear program in exchange for limited sanctions relief.

(Read More: OPEC to hold production steady to offset Libya decline)

These sanctions by the U.S. and European Union on Iran's energy sector have prevented western energy companies from dealing with Tehran, slashing exports from 2.5 million bpd to around 1 million bpd.

Will Iranian oil reach market mid-2014?
Will Iranian oil reach market mid-2014?

Sanctions will remain in place and Iran hasn't the permission to increase exports yet, but it does freeze U.S. plans for deeper cuts to Iranian crude exports. Iranian output stood at 2.65 million bpd in November, according to a Reuters survey.

Bill Farren-Price, oil analyst and CEO of Petroleum Policy Intelligence told CNBC that he was critical of the claims made by Iran, saying that major production bottlenecks in the country meant it would be hard for them to ramp production in such a short space of time.

"I really don't think it's going to happen," he said.

Johannes Benigni, managing director of JBC Energy, told CNBC that Iran might be looking to increase production but the agreement with the U.S. and the EU hasn't yet been completed and any predictions might be premature.

"They might not cut a deal," he said. "If there is no deal there are troubles." Benigni added India would be one country willing to accept Iranian imports if sanctions were fully lifted due to the proximity and the price. "Indians like Iranian oil. To some extent they are all excited," he said.

(Read more: Iran oil, energy sanctions still in force: US)

Meanwhile, Iraq has said it is also targeting 4 million bpd as it recovers from years of war and sanctions. The country has already boosted production to nearly 3 million bpd this year. The country's oil minister stated at the OPEC meeting that it won't be cutting its production next year and it currently exports 2.4 million to 2.5 million bpd.

Libya has seen a cut in production due to ongoing tensions in the country after its civil war, but the country is also looking to return to full production soon. Its oil minister stated Wednesday that it hopes to return to full production of 1.5 million bpd one week after ports reopen in the country.

More oil flooding the market should send the price lower and it's down to OPEC to negotiate optimum capacity to keep the price at an ideal level - usually around $110. Saudi Arabia, OPEC's most influential producer with one-third share of group output, is traditionally the most flexible with its production. The country - which has strong ties to the U.S. - is the only producer globally that keeps any significant spare capacity.

Will OPEC trim its 2014 supply?
Will OPEC trim its 2014 supply?

Brent crude for January delivery was at $112.32 a barrel on Wednesday morning, ticking slightly lower since the start of the session. The benchmark - which is used to price two-thirds of the world's internationally traded crude oil – dropped $2 after the Iran deal but quickly regained ground and is trading at the same price as it did at the start of the year.

(Read more: Oil prices maybe losing Iranian 'risk premium')

Shale revolution

A higher price helps major Gulf producers ensure sufficient domestic budgets to cover key expenditure on social welfare. At the same time, prices have not risen to the elevated levels that may hurt demand from key consumers.

Future prices for Brent show markets are expecting a price fall in 2014, which Daniel Lacalle, senior portfolio manager at Ecofin, agrees with. He told CNBC that the "Middle East premium" is going to gradually recede and prices will fall.

"Falling energy prices are always very good for the economy....the biggest stimulus in the U.S. has not been QE (quantitative easing), it's been the falling energy prices," he told CNBC Wednesday.

OPEC's negotiations come at a time when the U.S. is undergoing a revolution in shale gas and oil. The IEA has predicted that the U.S. will surpass Russia and Saudi Arabia as the world's top oil producer by 2015, and be close to energy self-sufficiency in the next two decades. OPEC, therefore, are expected to be ready to cut the production of oil at some point in the next few years as the U.S. ramps up its efforts.

Saudi Arabia's Ali al-Naimi told CNBC at the OPEC meeting that he was not concerned about U.S. production and any potential impact on oil price.

"This is a welcome addition to world reserves and we welcome it," he said.

By CNBC.com's Matt Clinch. Follow him on Twitter @mattclinch81