OPEC might still agree an oil output-limiting deal later this year as the economic problems of its de-facto leader Saudi Arabia force Riyadh to cede more ground to arch-rival Iran.
Saudi Energy Minister Khalid al-Falih said on Tuesday Iran, Nigeria and Libya would be allowed to produce "at maximum levels that make sense" as part of any output limits which could be set as early as the next OPEC meeting in November.
That represents a strategy shift for Riyadh, which has said it would reduce output to ease the global glut only if every other OPEC and non-OPEC producer followed suit. Iran has argued it should be exempt from such limits as its production recovers after the lifting of EU sanctions earlier this year.
The Saudi and Iranian economies depend heavily on oil but in a post-sanctions environment, Iran is suffering less pressure from the halving in crude prices since 2014 and its economy could expand by almost 4 percent this year, according to the International Monetary Fund.
Riyadh, on the other hand, faces a second year of budget deficits after a record gap of $98 billion last year, a stagnating economy and is being forced to cut the salaries of government employees.
"Does the salary cut indicate the Saudis are ready for a fight or does it indicate that they are ready for a deal," said an OPEC source from a Middle Eastern producer, when asked about the Saudi shift.
Iranian Oil Minister Bijan Zanganeh said on Wednesday talks about a deal to cap output were ongoing. OPEC began an informal meeting at 1430 GMT, but few OPEC watchers expect any deal before a formal, regular gathering on Nov. 30.
Oil prices were up around 1 percent, with Brent crude trading at about $46.50 per barrel by 1440 GMT.
LOW OIL PRICE PRESSURES
Saudi Arabia is by far the largest OPEC producer with output of more than 10.7 million barrels per day (bpd), on par with Russia and the United States. Together, the three largest global producers extract a third of the world's oil.
Iran's production has been stagnant at 3.6 million bpd in the past three months, close to pre-sanctions levels although Tehran says it wants to ramp up output to more than 4 million bpd when foreign investments in its fields kick in.
"Iran is not losing as much as Saudi. They are in a stronger position," an OPEC source traveling to Algeria this week said when asked about the shifting dynamic within OPEC.
Saudi oil revenue has halved over the past two years, forcing Riyadh to liquidate billions of dollars of overseas assets every month to pay bills and cut domestic fuel and utility subsidies last year.
"The Iranians have lived with a very tough macro backdrop for many years, and are not used to the government���s benevolence - whether subsidies, employment or spending contracts - in the manner the Saudis are," said Raza Agha, chief Middle East economist at investment bank VTB Capital.
"So a sustained drop in oil prices has a more difficult social impact on Saudi."
However, with unemployment in double digits, Tehran is also facing calls to maximize oil revenues and President Hassan Rouhani is under pressure from conservative opponents to deliver a faster economic recovery.
"The nation is still grappling with the sanctions overhang and an inability to create the jobs it needs, on top of longer-term structural issues,��� said Emad Mostaque, strategist at London-based consultancy Ecstrat.
At $45 per barrel, oil prices are well below the budget requirements of most OPEC nations. But attempts to reach an output deal have also been complicated by political rivalry between Iran and Saudi Arabia, which are fighting several proxy-wars in the Middle East, including in Syria and Yemen.
OPEC sources have said Saudi Arabia offered to reduce its output from summer peaks of 10.7 million bpd to around 10.2 million if Iran agreed to freeze production at around current levels of 3.6-3.7 million bpd.
For Gary Ross, a veteran OPEC watcher and founder of U.S.-based think tank PIRA, the offer was unacceptable for Iran given that Riyadh has raised production in recent years to compete for market share while Iran's output was limited by sanctions.
"Given the anti-Iranian sentiment in the kingdom, it is very difficult for Saudi Arabia to do anything in OPEC which looks too beneficial to Iran," Ross said.
���The salary cut highlights the urgency of the national transformation plan. If the Saudis did something aggressive to oil prices at this time, it would go against this urgency."
Falih said on Tuesday he saw no need for significant output cuts as the market was rebalancing itself. He added that Saudi Arabia was investing in additional spare capacity and could withstand the current trend in oil prices. The kingdom has bigger reserves than Iran and better access to debt markets.
"The Saudis are hardly in such a terrible pickle that they would want to become buddy-buddy with Iran, particularly at a time when geopolitical tensions have hardly eased,��� VTB's Agha said.
(Additional reporting by Vladimir Soldatkin, Patrick Markey and Lamine Chikhi in Algiers, Andrew Torchia in Dubai; Writing by Dmitry Zhdannikov; Editing by Dale Hudson)