Iran dented the efforts of other big oil exporters to limit production Wednesday by refusing to curb its own output, demonstrating the limits of OPEC's power to boost prices amid rising tensions among its members.
Oil minister of Iran, Bijan Zanganeh's decision threw into question the future of a plan brokered by Saudi Arabia and Russia this week for major oil producing countries to limit their output to last month's levels.
The efforts come as the Organization of the Petroleum Exporting Countries scrambles to find ways to prop up an oil market rocked by surging production that outpaces demand by more than one million barrels on any given day. Prices have fallen by two-thirds since June 2014, throwing global markets into turmoil and ravaging OPEC countries like Venezuela and Nigeria and nonmember Russia.
The broken-down oil talks also added a new layer to the heightening tensions between Saudi Arabia and Iran, longtime rivals who are the Middle East's dominant powers for the Sunni and Shiite strains of Islam, respectively. Iran and Saudi Arabia are backing opposing sides on several battlefields, including Syria, where Iran supports President Bashar al-Assad and Saudi Arabia supports opposition groups who want to unseat him in the country's five-year war. Saudi Arabia is also leading a military coalition in Yemen fighting Shiite Houthi rebels whom Iran says it supports politically.
The tensions reached new heights in January when Iranians angered by Saudi Arabia's execution of a prominent Shiite cleric stormed and set fire to Saudi diplomatic buildings in Iran. Saudi Arabia then cut all diplomatic and commercial ties with the Islamic Republic.
The countries are also increasingly at odds in the oil business since Western sanctions against Iran were lifted in January. Tehran and Riyadh are waging a price war as they approach refineries in Europe, a market that Saudi Arabia swooped into when Iran was forced out by sanctions. An Iranian official cited Saudi Arabia's production increase while Iran was crippled by sanctions as a reason to snub any output deal now.
The conflicts between OPEC's two most influential members have made it increasingly difficult to coordinate action within the 13-nation cartel that controls more than a third of the world's oil. Saudi Arabia and other supporters of production limits didn't offer official reactions to Iran's inaction, but some were privately dismayed.
OPEC's president, Qatar's oil minister Mohammed Bin Saleh al-Sada, led a delegation to Tehran on Wednesday to try to persuade Iran's oil ministry to join in limits. After a two-hour meeting over pastries, the group left without issuing a statement or joining Mr. Zanganeh at a later news conference. "Not very encouraging," said an OPEC official from a Persian Gulf Arab country.
The attempt to get Russia and OPEC on the same page represented a departure for Saudi Arabia, which had been convinced that limiting output only helped rival producers. With prices so low, Saudi Arabia saw the talks with Russia, Iran and others as an exercise in building trust, said another OPEC official from a Persian Gulf Arab country. Production curbs are difficult to monitor, and Saudi Arabia has accused Russia, Iran and others of violating agreements in the past.
U.S. oil prices settled up 5.62% Wednesday at $30.66 a barrel, as expectations that Iran would reject the Saudi plan altogether faded. Mr. Zanganeh said the Saudi agreement with Russia and others was a "first step and more steps must follow."
David Meaney, portfolio manager at BP Capital LP, said, "Short-term, if OPEC is able to agree on anything, that's a step in the right direction."
But Wednesday's talks offered little hope that the world's oil-supply surplus would be addressed soon. Surging output from Saudi Arabia, Iraq, Russia and the U.S. were part of the reason for the supply glut. Output has fallen in the U.S., with data released Wednesday showing North Dakota's fell to its lowest levels since August 2014. But even if the OPEC producers and Russia decided to limit output to January levels, demand wouldn't catch up with supply until late this year.
Venezuela, Russia and Iran are all facing exceptional challenges. Caracas's economy is contracting after years of social overspending, Moscow is subject to stringent international sanctions while Tehran is only starting to recover from decades of isolation. Limiting production would clash with Iran's national priorities now that sanctions over its nuclear program have been lifted. Iranian officials have said they are well on their way to increasing output by one million barrels a day this year and won't consider limits until then.
Earlier Wednesday, Venezuelan president Nicolá s Maduro tweeted a statement praising the decision by Saudi Arabia and Russia in Doha to freeze output. But he didn't make any reference to the Tehran meeting where his country was also represented. Mr. Zanganeh told state media that he talked to Mr. Sada and Venezuela's oil minister Eulogio del Pino about the importance of Iran's return to the export market.
Shana, the state-run news service of Iran's oil ministry, said, "They viewed the reality with a logical view."
There are doubts that Iran can ramp up production as quickly as its oil ministry says. Tehran recently canceled a forum in London to unveil new terms for international oil companies to work in Iran because the contracts haven't been completed. Iran says it needs $30 billion in oil-and-gas-field investments to achieve its long-term production goals.
Another missing piece for OPEC is Iraq. The country has contributed to the global glut with record production reaching 4.35 million barrels a day—the second-most in OPEC. The increased output represents the renaissance that has taken place in Iraq's oil industry since the fall of Saddam Hussein, but also the country's deep need for money—as it furiously pumps oil to generate revenue to fight its war with Islamic State.
Iraqi officials have signaled that they are willing to limit their production, if others follow suit. Iraq's oil minister attended the meeting in Tehran but didn't comment afterward. OPEC has overcome more serious conflicts than those facing Saudi Arabia and Iran. Kuwait and Iraqi oil ministers managed to sit down at the same table to discuss production even after Iraq's invasion in 1990. Iraq and Iran coordinated production during a brutal war in the 1980s.
Previous OPEC production cuts took months to negotiate and there were often false starts.