London

THE international nuclear agreement with Iran might not be the only deal US President Donald Trump has unravelled.

On Monday, Saudi Arabian Energy Minister Khalid Al-Falih was repeating his mantra that production cuts by Opec and its allies must keep going. Within 48 hours, the kingdom had raised the prospect of increasing output.

Between the two pronouncements came Mr Trump's decision to scrap the nuclear accord with Iran, re-imposing sanctions on the world's fifth-biggest oil exporter.

"The Iranian sanctions may change the Opec June meeting completely," said Amrita Sen, chief oil analyst at consultants Energy Aspects Ltd in London. "It's no longer about extending the production cuts, but rather about when to start raising output gradually."

For the past 16 months, the Organization of the Petroleum Exporting Countries (Opec), Russia and other allies have been constraining output to eliminate a global glut. They've largely achieved that goal, but the Saudis - keen for higher prices - have insisted the curbs should continue to drive oil stockpiles even lower.

That policy may falter in the wake of Mr Trump's Iran sanctions. While it's still uncertain how far he intends to curtail Iranian oil shipments, most analysts predict a cutback.

When the international sanctions were last in force on Iran from 2012 to 2015, it removed about one million barrels a day from the market.

This time, America's allies in Europe want to keep the nuclear accord alive and are resisting joining any US embargo.

Estimates vary from "little impact" anticipated by Barclays Plc, to a potential loss of more than 50 per cent of the country's 2.7 million barrels of daily shipments predicted by consultant FGE.

Reduced flows from Iran would compound escalating losses in troubled Opec member Venezuela, further draining global oil inventories while demand remains strong, according to Goldman Sachs Group Inc. Oil futures rose to a three-year high of US$77.65 a barrel in London at 8.10 am on Thursday.

This presents the Saudis with a dilemma: Should they retain their focus on higher prices and keep output steady? Or should they offer political and economic support to Mr Trump, and take market share away from their regional rival, by raising production to fill the gap?

A statement released by the kingdom a few hours after Mr Trump's announcement seemed to provide the answer. Saudi Arabia will "mitigate the effects of any supply shortages", it said. Kuwait later gave a similar assurance.

"The signal from that is: the Iranian oil lost, we will replace," Fereidun Fesharaki, founder and chairman of FGE, said in a Bloomberg television interview.

Boosting output to compensate for Iran and rein in rising prices would prevent damage to the global economy, and fuel demand.

With US gasoline costs rising, the move could also appease President Trump, who last month lashed out at Opec for keeping prices "artificially very high".

There are risks too. Increasing supply by too much, or without coordination with fellow producers such as Russia, could inundate markets and drive prices lower. The alliance they established in 2016 could dissolve into mutual rivalry and suspicion.

"Opec has to engage in some balancing acts," said Bassam Fattouh, director at the Oxford Institute for Energy Studies. "They want to preserve the deal that they worked very hard to achieve," he said, referring to the group's historic production cuts.

In a sign that Riyadh is aware of the political sensitivity of any oil-production increase, Mr Al-Falih said in a post on Twitter on Wednesday that he was in "close contact" with other Opec nations, Russia and the US on how to "ensure market stability."

Much depends on Russia. The Kremlin will have to weigh its alliance with Iran in the Syrian conflict against the new bond forged with Saudi Arabia and the temptation of boosting production of Urals crude that could replace Iranian barrels in Europe.

If the latter argument prevails, President Trump's decision may in fact have finally provided Opec and Russia, who in 2016 had expected their effort to take just six months, with an exit strategy.

"It will be interesting to see if there is clear language in the next Opec meeting statement signalling an unwinding of the accord at the end of the year," said Helima Croft, chief commodities strategist at RBC Capital Markets LLC. BLOOMBERG