Iran's OPEC impact: Wait for it

Six months ago, as OPEC prepared for its last meeting, I wrote that the event was likely to be a lull before the storm.

At the time, oil prices were enjoying a bounce up, suggesting OPEC's strategy of pumping more oil, protecting its market share and putting pressure on higher-cost oil in the USA and other countries was paying off.

More importantly, Iran was  weeks away from reaching an agreement with the United States and other world powers over Tehran's nuclear program, an event that would  eventually end Western sanctions on Iran's oil exports.

Given that, I, like other oil market watchers, expected little to happen at OPEC's meeting June 5 but saw the cartel's next gathering Dec. 4 as likely to be much livelier. By then, I assumed, the Iran deal would be signed, if not  implemented, and that nation would be eager to re-establish itself as a leader in OPEC and world oil markets.

Well, the expectations for the meeting in June turned out to be right as Saudi Arabia and other OPEC members stuck to their production strategy.

But the forecast for a storm this Friday, when OPEC ministers convene again in Vienna, may be off the mark.

"Nothing we see suggests they see things differently right now. And that's strange because Iran is the elephant on the coffee table in some ways," Robert McNally, an energy adviser to President George W. Bush, said of prospects for a change in OPEC policy at the meeting.

"But because the sanctions haven't been lifted yet and OPEC doesn't often deal with things until they are on top of them, Iran may not be on the agenda, though it will be on everyone's mind," McNally said.

A bigger concern for the oil ministers is the  slump in oil prices, which have taken another steep downturn since rallying at $67 a barrel in May. Lately, the global oil benchmark, Brent, has traded at about $45 a barrel

Poorer members of OPEC such as Nigeria and Venezuela will continue to call for cuts in OPEC's production target of 30 million barrels a day but not the affluent producers led by Saudi Arabia, which still produce at high levels despite low prices.

"Other OPEC members say they know who has to do the cutting," McNally,   president of the Rapidan Group, said in an interview. "But the Saudis aren't there yet."

Former U.S. Energy secretary Spencer Abraham and Joseph McMonigle, both senior energy analysts with Potomac Research Group, say Saudi Arabia can afford to wait longer before considering any changes in oil production.

"We believe the Saudis are prepared to continue at current production levels for at least another year," Abraham and McMonigle wrote in a note to clients, citing the kingdom's "substantial currency reserves" and its steps to shore up its finances.

Moreover, Abraham, who was U.S. Energy secretary from 2001 to 2004, and McMonigle said leaders of Saudi Arabia have "no incentive to stabilize and increase prices in time" for new oil exports from Iran, a political rival to Riyadh.

"They won't mind seeing record low prices greet Iran's crude," they observed.

That said, more storm clouds may  form soon for oil markets.

Abraham and McMonigle anticipate "a volatile year" ahead for OPEC, considering the re-emergence of Iran's oil exports, not to mention the potential for terrorist attacks on oil infrastructure in the Middle East.

"Iran will increasingly become a thorny issue for the Saudis and OPEC policy going forward," they said. "While analysts disagree on the timing and amount, there will certainly be hundreds of thousands of additional barrels of Iranian crude exports hitting the market sometime next year."

Other factors  spell trouble for oil producers in and outside  OPEC. Among them: projections by the International Energy Agency of slower growth in world oil demand; forecasts of warmer weather this winter; and record oil inventories.

McNally sees "a lot of optimism" reflected in  oil prices, even at $40 or so a barrel. "That's misplaced, at least for the near term," he said, adding that prices could tumble much more before rebalancing at a higher level.

As for the next OPEC meeting, it seems  it may be the lull before a storm in June, when the oil ministers will gather again, or something like that.