Oil price needs more than Middle East crisis for rebalancing
Usually, when geopolitical tension erupts amongst the oil producing countries, the oil price surges as investors worry. At almost any other time, an escalating diplomatic conflict between Organization of Petroleum Exporting Countries (OPEC) members Iran and Saudi Arabia would mean a spike in oil prices. Not this time. In the wake of the global fallout from Saudi Arabia’s execution of 47 dissidents, including Shiite cleric Nimr al-Nimr, and Iran’s subsequent dismantling of Saudi’s embassy in Tehran; while this briefly drove prices higher, that the rally could not be sustained depicting how abnormal things are in the oil market.
The prevailing view is that the tension would prevent the powerful oil cartel, OPEC, of which both countries are members, from agreeing on production cuts to support higher prices. The fact that Kuwait and the United Arab Emirates lined up to support Riyadh reveal the internal divisions that prevented the OPEC from making production cuts even as prices plunged to an 11-year low appeared more entrenched than ever. The U.A.E. reduced its representation to Iran, while Kuwait said it backed “all measures adopted by Saudi Arabia to maintain its security and stability”.
While unrest in the region increases the risk of production outages, some analysts say the tension is more likely to add to the global glut of crude oil as the two producers compete for market share, weighing on prices.
Oil prices slumped back towards their lowest levels in almost 12 years this morning and traders are placing record bets on prices falling further in the coming months. International benchmark Brent crude gave up gains made at the end of last week, when it recovered to a little above $34 a barrel at one point, after more evidence emerged of waning demand in China, one of the biggest oil consumers in the world. The price dipped as far as $32.50 a barrel.
The price of crude sold by OPEC members slid below $30 a barrel, the lowest level in almost 12 years, as turmoil in Chinese markets deepened the global commodities rout. The daily basket price of crudes produced by the 13 members of the Organization of Petroleum Exporting Countries fell to $29.71 a barrel down from $31.21.
Iran is about to emerge from years of international sanctions and stands ready to bring 500,000 additional barrels of oil per day to a market already oversupplied to the tune of up to two million barrels. The country already has “customers lined up”, especially in Europe.
Relations between Saudi Arabia and Iran, the first and third largest OPEC producers, are not known to have been warm based on territorial wars between the Sunnis, a majority of whom live in Saudi Arabia, and the Shiites, which are mostly in Iran.
The most recent tensions between the two Middle East countries have been so strained that some analysts have suggested Saudi Arabia’s OPEC decision in December to maintain its production was meant to inflict pain on Iran’s economy as much as it was a means to threaten US shale oil production.
However, should violence break out in the Eastern province of Saudi Arabia, home to most of its Shiite community and its richest oil fields, the impact on prices could be more significant.
The dispute strengthens the biggest bearish factor in the oil market in the past year, OPEC’s decision to keep pumping amid falling prices.
While Iran is set to boost to oil production as sanctions on its nuclear program are lifted this year, it has called on other OPEC members to cut output. This is opposed by Saudi Arabia and its Gulf allies. Saudi Arabia already has expressed its unwillingness to cut production to make room for the Iranian barrels. The heightened tensions with Saudi Arabia could encourage Iran to accelerate its production increases.
Saudi Arabia’s planned cuts in spending and energy subsidies signal that the world’s largest crude exporter is bracing itself for a prolonged period of low oil prices. The OPEC heavyweight shows no signs of wavering in the long-term oil strategy it has orchestrated since last year. Instead, it appears willing to continue tolerating cheap crude to defend market share and wait for the market “to balance” without cutting supplies.
Saudi Arabia produced 10.2 million barrels a day of crude oil in November, or about 11 percent of global output of crude and related liquids, according to the International Energy Agency. Iran produced 2.9 million barrels a day of crude that month.
FRANK UZUEGBUNAM