OPEC Members are Cutthroat Competitors: Russell

China's renewing of its oil purchase deals with Iran not only provides a boost to the Islamic Republic's hopes of re-establishing itself in global markets, it also underscores why this week's OPEC meeting is largely irrelevant.

The market consensus is that Friday's gathering of the Organization of the Petroleum Exporting Countries (OPEC) won't produce any significant change in the group's output policy.

This is notwithstanding some apparent tentative signals from top producer Saudi Arabia that it may consider cutting output, as long as the rest of OPEC and major non-OPEC countries such as Russia also trim output.

While this idea appears stillborn, given Russian opposition, the renewing of an oil purchase agreement between Iran and China is more significant, as it shows why any moves to curtail global output are doomed to fail in the current environment.

Iran agreed with its top two Chinese buyers, Sinopec Corp , Asia's largest refiner, and Chinese state trader Zhuhai Zhenrong Corp, to sell about 505,000 barrels per day (bpd) in 2016, according to a Reuters report on Dec. 3.

Iran is also talking to other potential buyers in China about term deliveries next year, according to the industry sources cited in the report.

China bought 536,000 bpd of Iranian crude in the first 10 months of 2015, down 1.9 percent on the same period a year earlier.

With Iran having already locked in 505,000 bpd for 2016, the likelihood is that it will be able to boost the amount it supplies to China next year, assuming that it can sign up other buyers.

This task should be made easier by the expected easing of sanctions against Iran as a result of the deal with Western powers over its nuclear programme.

Iranian oil officials have also met with traders at PetroChina (PCCYF), the country's second-largest state refiner, and state-run CNOOC, which runs a petrochemical complex with Royal Dutch Shell (RYDAF), Reuters reported, citing three sources involved in the talks.

NO PARTNERS IN OPEC
While it's to be expected that Iran, once OPEC's number two exporter, will seek to regain market share as sanctions are lifted, the significance is that it shows that OPEC members now view each other more as competitors than as partners in the global oil market.

In previous periods of over-supply, it could have been reasonably expected that OPEC would try to control supply in order to boost prices, but this is no longer the case.

The reports that the Saudis would only entertain an output cut if OPEC as well as non-OPEC producers participated underline that OPEC is currently an organisation in name only.

When the Saudis, or anybody else, talk about an output cut, what they really mean is targeting the oil that flows to Asia from the Middle East and Russia.

About two-thirds of Saudi oil is bought by Asian refiners, and cutting supply to this region would be the most effective at boosting global prices.

However, the current situation is that there is a price war in Asia between Saudi Arabia, Iraq and Russia, and these three will likely be joined by Iran in 2016.

Saudi Arabia is "being hit from all angles, facing direct challenges from Russian, Iranian and Iraqi crudes," according to a Thomson Reuters Oil Research and Forecasts special report published on Thursday.

"Iran and Iraq continue to compete to solve their respective domestic economic woes with plans to saturate the market with similar grades," the report said.

"Meanwhile, Russia is working to squeeze some of Saudi Arabia's barrels out of Asia, to which Saudi has retaliated by sending heavily discounted grades into Europe. Consequently, Saudi Arabia is no longer a spectator to the battle for market share; it has become fully embroiled," the report said.

Any talk of cutting oil output can be dismissed as hot air when viewed against the planned increases in production.

Iraq is expected to raise its output to 4.38 million bpd in 2016, a 13 percent increase over this year, according to Thomson Reuters Oil Research and Forecasts, while Iran's will jump 19 percent to 3.38 million bpd.

With rising Middle East output driving competition, it's likely that Atlantic Basin crudes will come under pressure in Asia, something that will heap further pressure on the oil-reliant economies of OPEC producers Nigeria and Angola.

In turn this will likely lead to further disunity among OPEC members and likely exacerbate competitive discounting, making it harder to construct a bullish case for oil based on supply fundamentals.

By Clyde Russell