Iran, Iraq in dispute with Saudis ahead of OPEC meeting

Iran and Iraq are resistingpressure from Saudi Arabia to curtail oil production, making ithard for the Organization of the Petroleum Exporting Countriesto reach a deal to limit output and boost the price of crudewhen it meets on Wednesday.

• Analysis: OPEC could lose market share in a world awash in oil

OPEC sources told Reuters a meeting of experts in Vienna onMonday failed to bridge differences between OPEC's de factoleader, Saudi Arabia, and the group's second- and third-largestproducers over the mechanics of output cuts.

On Tuesday, tensions rose further after Iran wrote to OPEC saying it wanted Saudi Arabia to cut production by as much as 1million barrels per day (bpd), much more than Riyadh is willingto offer, OPEC sources who saw the letter told Reuters.

"It is a response to Saudi telling Iran what to produce,"one of the sources said.

Iranian Oil Minister Bijan Zanganeh told reporters uponarrival in Vienna that he was not prepared to reduce output: "Wewill leave the level of production (where) we decided inAlgeria."

OPEC, which accounts for a third of global oil production,agreed in September to cap output at around 32.5-33.0 millionbarrels per day (bpd) down from the current 33.64 million bpd, to prop upoil prices, which have halved since mid-2014.

OPEC said it would exempt Iran, Libya and Nigeria from cutsas their output has been crimped by unrest and sanctions.

Regional rivalries

The deal was seen as a victory for Iran. Tehran has longargued it wants to raise production to regain market share lostunder Western sanctions, when its political arch-rival SaudiArabia increased output.

In recent weeks, Riyadh offered to cut its own output by 0.5million bpd, according to OPEC sources, and suggested Iran limitproduction at around 3.8 million bpd - in line with or slightlyabove the country's current output. But Tehran has sent mixedsignals including that it wanted to produce 4.2 million bpd.

Iraq has also been pressing for higher output limits, sayingit needs more money to fight the militant group Islamic State.Iran and Iraq together produce over eight million bpd, only slightlybehind long-time leader Saudi with 10.5 million bpd.

The argument between Iraq and Saudi Arabia mainly focuses onwhether Baghdad should use its own output estimates to limitproduction or rely on lower figures from OPEC's experts.

As tensions within OPEC mounted, Saudi Energy MinisterKhalid al-Falih said at the weekend that oil markets would rebalance even without an output-limiting pact. He hadpreviously said Riyadh was keen for a deal.

Falih landed in Vienna on Tuesday evening, leaving littletime for traditional pre-meeting discussions with otherministers.

"The feeling today is mixed," Indonesian Energy MinisterIgnasius Jonan told reporters on Tuesday when asked about theprospects of a deal. "I don't know. Let's see."

Documents prepared for Wednesday's meeting propose the groupcut production by 1.2 million bpd from October levels, an OPECsource familiar with the papers said.

The papers also propose Saudi Arabia reduce production to10.07 million bpd from 10.54 million bpd in October and thatIran freeze output at 3.797 million bpd, according to thesource.

Outlook for oil prices

The price of West Texas Intermediate crude oil was down 3.74 per centat 3:15ET on Tuesday, to $45.32US a barrel.

Brent crude was down 3.69per cent, at $46.46US abarrel.

Some analysts including Morgan Stanley and Macquarie havesaid oil prices will correct sharply if OPEC fails to reach adeal, potentially going as low as $35 US per barrel.

Goldman Sachs, one of the most active banks in oil trading,said on Tuesday it saw prices averaging $45 a barrel untilmid-2017 even without any OPEC deal and added the market waslikely to move into a deficit in the second half of 2017.

A year ago, Goldman was saying a global glut would push oilprices to around $20. Prices fell to multi-year lows of $27 perbarrel in January 2016.

Besides disagreements with Iran and Iraq, Saudi Arabia hasalso signalled it was unhappy with Russia's position.

Oil ministers from OPEC members Algeria and Venezuelatravelled to Moscow on Tuesday to try to persuade non-OPECRussia to take part in cuts instead of merely freezing output,which has reached new highs in the past year.

They made no comment as they emerged from their meeting.Russian Energy Minister Alexander Novak said he had no plan totravel to Vienna but could meet OPEC once it reaches a deal.