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Why Saudi Arabia won't play nice at OPEC meeting

The day oil markets have been waiting for has finally arrived. But despite reports suggesting Saudi Arabia could be ready to cut production in a bid to support prices at Friday's meeting of the Organization of Petroleum Exporting Countries (OPEC), analysts say no one should expect magnanimity from the group's largest producer.

Oil prices rallied on Thursday amid a weaker dollar and a report by Energy Intelligence that suggested that Saudi Arabia, the de facto leader of the 12-member oil producing group, could be ready to make a formal proposal for OPEC output cuts -- as long as non-OPEC producers did the same.

Saudi Oil Minister Ali al-Naimi (C) speaks with United Arab Emirates Energy Minister Suhail bin Mohamed al-Mazroui (R)

By Friday, however, those rumors had been widely dismissed and analysts said OPEC was unlikely to deviate from its production ceiling of 30 million barrels per day (bpd). It has often exceeded this level in recent months, despite a glut in global oil supply which has seen prices tumble from last June, from $114 a barrel to around $40 currently.

Saudi Arabia's oil minister Ali al-Naimi rebuffed the report Friday, saying that while Saudi was ready to cooperate with "anyone who helps balance the market" the report of a cut was "baseless," Reuters reported.

The move by OPEC not to cut has been largely seen as a way for the group to maintain market share in the face of rivalry from U.S. shale oil producers who have higher-cost production. The strategy appears to have worked with many U.S. producers closing rigs, canceling projects and lowering production.

Playing nice in the sandbox

Saudi Arabia has always led the call to not cut despite the reluctance of poorer OPEC members, such as Venezuela.

On Friday, Venezuelan oil minister Eulogio del Pino told CNBC Friday that his country was proposing a 5 percent cut to OPEC production because its current "over-production" could have what he called a "catastrophic" effect on oil prices.

Analysts did not foresee any major policy changes from Saudi Arabia, however.

"I think they (Saudi Arabia) have taken a more conciliatory stance to prevent a major fight at OPEC today but the substance remains the same: We're not cutting unless Mexico cuts, unless Russia cuts and certainly the Iranians have to do their fair share but they're saying, 'Don't hold us back, we're going to put an extra 500,000 barrels on the market'," Helima Croft, chief Commodities strategist at RBC Capital Markets told CNBC Friday.

"I think the Saudis want to appear like they are playing nice in the sandbox, that they're listening to all the views of the membership. I don't expect a real substance of change today," she said, warning that if Saudi did cut production today, a "wave" of U.S. shale oil production could return, flooding the market with yet more oil.

Markets can ill-afford to see more oil come onto the market.

As such, Johannes Benigni , chairman of JBC Energy, conceded that any OPEC cut could be "self-defeating" but he was bullish on prices rises in the medium-term.

"The shale producers will come back when prices go higher but the question is by how much? The more that investment is reduced over the next three or four years the more the market is going to balance so in theory, we should see prices in the next half-year start to balance and then prices will go slowly up," he told CNBC in Vienna on Friday.

The wildcard

As well as watching non-member competitors in the shale oil industry, Saudi Arabia is closely watching what neighboring producers are doing.

The prospect of international sanctions being lifted on Iran and the country's oil industry coming back in force is looking increasingly likely. Iran has made no secret of the fact that it wants to produce 4 million barrels of oil per day by the end of 2016 -- and that the amount it produces is not up for discussion.

Iran's oil minister, Bijan Zangeneh, said his country is not discussing its production after the lifting of sanctions. "It is our right and anyone cannot limit us to do it," he reportedly said in Vienna.

Benigni said that Iran needed investment and would not come back with the large volumes as markets expected. Instead, he said the "wildcard" was Libya, a country whose oil production has been hit by internal conflict and political instability. "We don't know whether they will come back – they could come any day," Benigni said.

It is worth considering that while Saudi is an important part of the global energy mix – roughly producing 10 million barrels per day out of the 90 million barrels consumed globally a day – it alone cannot help to rebalance prices.

Bill Farren-Price, chief executive of Petroleum Policy Intelligence, told CNBC Friday that now was not the time for cuts and understood why Saudi Arabia refused to be the swing producer – able to quickly cut production to support prices -- yet again. "Saudi Arabia is not going to hand Iran market share on a plate, they want to see how fast Iran can come on back to the market."