Saudi Arabia-Iran rivalry the stumbling block for an oil deal, analysts say

Longstanding tensions between Middle Eastern rivals Saudi Arabia andIran will hold OPEC back from an oil production freeze as the oil group meets in Algeria Wednesday, analysts said, underscoring geopolitical complexities within the group.

The meeting comes at a crucial juncture for oil prices that have witnessed a pronounced downturn amid an economic slowdown,excess supply from traditional producers as well as competition from shale producers in the U.S. A section of the market has hoped for a compromise between Saudi Arabia and Iran although conflicting objectives will likely ensure barriers to any agreement are high.

“The relations between Saudi Arabia and Iran are just so, so poor I can’t see any scenario under which Saudi Arabia would cut without Iran freezing and Iran has said so consistently that they just will not freeze until they reach pre-sanctions levels,” BMI Research ‘s oil and gas analyst, Emma Richards, told CNBC recently.

Fitch Group’s research arm BMI Research was not expecting an agreement on the production freeze at the informal meeting on the back of the conflicts within OPEC, with tensions between Saudi Arabia and Iran the “main impediment” to a deal, the house said in a recent report.

Iran is producing 3.6 million barrels of crude oil a day—under its 4 million barrels a day target, making it OPEC’s third largest oil producer after Saudi and Iraq.

The two countries, contended BMI Research, were vying for religious and regional political hegemony, facing each other through proxy conflicts in Syria, Yemen, Iraq, Lebanon and Bahrain.

“We’re talking about a long-term i.e. 1,400-year chasm between the Sunni side and the Shia side. OPEC has only been around for 60 years so what we’re looking at now is the greatest chasm between the Sunni side of OPEC and the Shia side of OPEC,” Stephen Schork, Editor of the Schork report told CNBC’s “Squawk Box”.

The rivalry has implications for the oil market, which has alreadywitnessed the failure of 14 OPEC members agreeing on a production freeze in April.

With Saudi’s economy under siege from the prolonged slump in oil prices, there was no reason why the oil giant would cede market share if Iran did not commit to a compromise, said Schork.

This was particularly true as a newly-emboldened Iran that was fresh out of sanctions “has some pretty aggressive hegemonic designs over the region,” Schork said.

Oil prices were flat on Wednesday in Asia after falling in the last session after Saudi Arabia dashed hopes of a deal this time. The benchmark U.S. crude oil futures contract was trading around $44.65 a barrel while European Brent was around $46 a barrel midday in Asia.

After mixed signals by various countries in the weeks leading up to the meeting, Saudi energy minister Khalid al-Falih al-Falih finally doused expectations of a deal on Tuesday when he said differences in opinions between OPEC countries were narrowing but that he didn’t expect an agreement from the meetings on Wednesday.

Most analysts were already expecting as much, shrugging off the next OPEC meet as nothing more than rhetoric. A CNBC oil survey found 65 percent of respondents saying no OPEC agreement was likely.

“We are always a little skeptical of announcements like these. There has been a consistent pattern over the last few months of OPEC ministers attempting to ‘talk up’ prices with comments about a potential output freeze deal being close. But historically most of these comments have proved to be unfounded,” wrote Capital Economics economist Simon Macadam in a note published on Monday.

There may still be an upside nonetheless, should a surprise deal come about, which would be a boost to prices.

Fifty-two percent of respondent in CNBC’s survey said if producers could strike a deal, there would be a meaningful effect on crude prices.