Old disputes between Saudi Arabia and rival Iran resurfaced at a meeting of OPEC experts last week, with Riyadh threatening to raise oil output steeply to bring prices down if Tehran refuses to limit its supply, OPEC sources say.
Clashes between the two OPEC heavyweights, which are fighting proxy wars in Syria and Yemen, have become frequent in recent years.
Tensions subsided, however, in recent months after Saudi Arabia agreed to support a global oil supply limiting pact, thus raising the prospect that the Organization of the Petroleum Exporting Countries would take steps to boost oil prices.
But a meeting of OPEC experts last week, designed to work out details of cuts for the next OPEC ministerial gathering on Nov. 30, saw Saudis and Iranian clashing again, according to four OPEC sources who were present at the meeting and spoke to Reuters on condition of anonymity.
"The Saudis have threatened to raise their production to 11 million barrels per day and even 12 million bpd, bringing oil prices down, and to withdraw from the meeting," one OPEC source who attended the meeting told Reuters.
OPEC headquarters declined to comment on discussions during the closed-door meetings last week. Saudi and Iranian OPEC delegates also declined official comments.
Saudi Arabia has increased output since 2014 to record highs of around 10.5 million-10.7 million barrels per day and adding extra supply would only worsen the global glut, which has already seen prices more than halving from $115 a barrel since mid 2014.
The Saudi threat followed objections by Iran, which said it was unwilling to freeze its output, the same OPEC sources said. Iran has argued it should be exempt from such limits as its production recovers after the lifting of EU sanctions.
The Saudi threat will revive memories of a pump war that Riyadh embarked on at the end of 2014 to claw market share back from higher-cost producers. Iran along with other OPEC price hawks have severely criticized the Saudi strategy.
Riyadh has softened its stance since the appointment of Khalid al-Falih as energy minister in May this year.
In September, OPEC agreed at a meeting in Algeria on modest preliminary oil output cuts in the first such deal since 2008, with special conditions given to Libya, Nigeria and Iran, whose output has been hit by wars and sanctions.
A new rise in tensions observed during the meeting of experts last week highlights the fragile nature of OPEC agreements. The group has a long way to go before it turns its preliminary Algerian accord into a real deal.
The Saudi threat to raise output came as a surprise even to Riyadh's Gulf OPEC allies, sources who attended the meeting of experts on Oct. 28 said.
One source said the Saudi OPEC delegation has asked to call off the next day's meeting with non-OPEC producers, including Russia, on Oct. 29 since Iran was objecting to a deal. But they were convinced by other members to attend it in order not to embarrass the group.
"We felt as if they (the Saudis) wanted the meeting to fail," said a third, non-Iranian OPEC source.
The Saudi OPEC delegation told their Iranian counterparts that Tehran should freeze output at 3.66 million bpd — the latest estimates of Iranian output by OPEC experts, known as secondary sources.
Iran has reported its output at 3.85 million bpd in September and said it would only cap its output at 12.7 percent of OPEC's total ceiling — or 4.2 million bpd.
Iran's counter-argument at the meeting was that Saudi Arabia has raised its output by almost 1 million bpd since 2014, and is now trying to convince others it would cut output by 400,000 bpd to get a deal, though in reality Riyadh has already won extra production and revenue, according to OPEC sources.
Iranian comments after meeting to domestic media indicated tensions were high.
"Working in oil industry is like operating at war fronts and we have to preserve our trenches by raising our production capacity as much as we can," Ali Kardor, managing director of the National Iranian Oil Company (NIOC), told the oil ministry's news agency Shana.
"The next OPEC meeting is near and we will never cease to recapture our quota in the organization," he said on Monday, adding that Iran's crude oil output was nearing 4 million bpd.
OPEC sources have said Saudi Arabia offered to reduce its output from summer peaks of 10.7 million bpd to about 10.2 million if Iran agreed to freeze production at around levels of 3.6 million-3.7 million bpd.
The Saturday meeting with non-OPEC producers went ahead though they made no specific commitment.
The High Level Committee of experts will meet again in Vienna on Nov. 25 to finalize the details ahead of the next meeting of OPEC ministers on Nov. 30.
OPEC Secretary-General Mohammed Barkindo has said he is "optimistic" a final agreement will be reached. An OPEC delegate, who attended Friday's meeting, said he still hoped for a deal in November.
"People can look at it from different angles. The fact that discussions are still going on is a positive one. They are going to work on it, close to the ministers' meeting," the delegate said.
(Writing by Dmitry Zhdannikov, Editing by Angus MacSwan)