Iran has only recently returned to the market having been under Western sanctions. Under such constraints, the country saw a dramatic decline in oil exports. Now free to deal with old customers, the intention is to increase production . This has added to the supply glut and helped push the oil price lower. Iran will not condone a production cut that is detrimental to the countries’ objectives of gaining market share. Aside from market share gains, the Old Guard in Tehran have a strained relationship with the House of Saud in Riyadh. The two countries are fighting proxy wars across as the Middle East and earlier this year an Iranian Shia Cleric  was executed in the Kingdom. The odds of Iran and Saudi Arabia coordinating production levels to support the market are slim to none.

With an economy in recession  and a shrinking budget, the Russians are desperate for a fix to the supply glut. The oil minister, Aleksander Novak, has spent much of the year in the Middle East coercing Iran  and OPEC members that a production freeze will stabilise the oil market. OPEC and non-OPEC productions agreed to maintain production at January 2016 levels. This has helped the oil market move higher, however the production freeze agreement is a temporary solution that does not fix the oversupply problem. The Russian budget is calculated using the Urals oil benchmark (Russia’s’ oil export blend). Ural’s oil is of a lower grade than the international benchmarks, Brent Crude (Brent) and West Texas Intermediate (WTI). As a result, Urals oil trades at a discount  (lower price). An immediate reversion of the current OPEC policy is required to fill the trade deficit.

Chart 1.

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