Iran has dealt a severe blow to Saudi-led efforts to curb oil production and reverse the two-year-old downturn in crude prices by rejecting an offer from Riyadh to cap output, sending Brent down more than 3.5 per cent.

Speaking before Wednesday’s closely watched oil producers’ meeting, Bijan Namdar Zanganeh, Tehran’s energy minister, said his country was not willing to freeze output until it had regained more than 4m barrels a day of production, heightening tension between two of the region’s most powerful petroleum producers.

Saudi Arabia has signalled it would back a co-ordinated production cut of up to 1m barrels a day to tackle a global supply glut but only if Iran agreed to freeze output at current levels that analysts calculate at 3.6m b/d.

Riyadh’s offer comes amid an ever gloomier outlook for Saudi finances, with the government racking up a record budget deficit of nearly $100bn. As part of a drive to find new savings and raise money, the government this week announced a 20 per cent cut to both ministers’ salaries and bonuses for public sector employees.

Its willingness to freeze output is a shift from its policy since the start of the oil price drop, when it pushed to keep production high to put pressure on rivals who pump crude more expensively.

Iran is just emerging from years of western sanctions against its oil industry and Tehran has said it is not interested in capping its output until it reaches pre-sanctions markets share of 13 per cent of Opec output. Based on the cartel’s current production, that equates to around 4.2m barrels a day, or about 600,000 b/d more than Iran currently claims to be pumping.

“At current levels we are not ready to freeze,” Mr Zanganeh said. “It is not on our agenda to reach an agreement in these two days.”

The comments sent oil prices down sharply on Tuesday. Brent crude, which has more than halved since mid-2014, was trading $1.68 lower at $45.67 a barrel.

Kahlid al-Falih, the Saudi energy minister, said that while he did not expect an agreement at Wednesday’s talks, “the gap between Opec countries is narrowing”. The main debate, he said, has centred on production levels for Iran, Libya and Nigeria.

Saudi officials said they were still talking to major producers, including Russia. They hope to find a consensus that could provide the basis for a deal later in the year.

“We are very happy that producers from outside Opec have started an effective dialogue and co-operation with the organisation. Russia in particular has had a leading role,” Mr Falih said earlier on Tuesday.

The Russian energy minister said he planned to meet Saudi officials again next month.

But Mr Zanganeh and Mr Falih’s comments suggest a deal to end the supply glut that has hammered oil prices and shredded the budgets of producer nations still has some hurdles to cross.

Analysts have said Iran’s position reflected a view that it can better withstand a further period of low prices than Saudi Arabia. “Iran’s dependency on oil revenues as a share of its national budget is much lower than Saudi Arabia’s,” said Ole Hansen at Saxo Bank.

While Opec ministers were hopeful for a deal on Wednesday, they have said the discussions are more likely to pave the way for an agreement in time for the group’s next formal meeting in November.

“The headlines look negative but an oil supply deal is definitely close and they are still talking. Getting Iran on board is still the key and that will require compromise,” said Bill Farren-Price, a consultant.

Iran finds itself in a better financial situation after the lifting of sanctions against its oil industry in January. That has allowed Tehran to raise production and exports.

In closed-door meetings Saudi Arabia has discussed with others several options for reducing production, should Iran agree to a freeze.

One option is to use monthly numbers as a base; another is an average of several months. Saudi Arabia’s preferred option is to use July and August’s output level as the base from which producers — bar Libya, Nigeria and Iran — would each slice off as much as 4 per cent from their output, one person familiar with Saudi policymaking has said.

Yasser Elguindi at Medley Global Advisors said that after two years of low prices that had squeezed production from higher cost rivals, such as US shale oil, Opec’s position was now different.

“Cutting production in 2014 to support [prices] would have resulted in lower revenues and lost market share. Today, Opec is in a position to cut production while the increasing price would result in higher revenues. That’s the big difference,” he said.

Additional reporting by Heba Saleh

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