Saudi-Iranian dispute has little impact on oil prices
Beirut - The rapid deterioration of diplomatic and political relations between Saudi Arabia and Iran, two major Organisation of the Petroleum Exporting Countries (OPEC) members, has had surprisingly little effect on oil prices as markets seem more focused on surpluses.
The Saudi-Iranian conflict has not caused a major shock to the oil market, as can usually be expected in such circumstances. The price of Brent crude hovered around $30- $35 per barrel in early January, continuing a long downward trend.
Several exporting countries are offering steep discounts to the public price formulas, selling at $20-$25, a sign of the fierce competition to hold to market share.
There are several reasons for the market reaction, including that there are no expectations that the conflict will change the fundamental oil positions of the two major producers.
Saudi Arabia has argued that it will not unilaterally decrease production. It has continued producing more than 10 million barrels per day (bpd) for nine consecutive months, arguing that it will maintain its long-held policy of meeting customers’ needs.
Riyadh also argues it is not ready to reduce supplies, demanding that both non-OPEC producers and OPEC members reduce supplies since it does not make market sense for Saudi Arabia to take such steps while other producers raise production levels. Riyadh is concerned about OPEC’s global market share, which has declined from around two-thirds of world output to around one-third.
Iran, having successfully negotiated a nuclear agreement with the P5+1, is awaiting eagerly for the end of economic sanctions against its oil industry and its crude oil exports.
Iranian oil officials have declared their intention to increase exports once sanctions are lifted. It is estimated that Tehran will raise crude oil exports by about 500,000 bpd. Iran currently exports approximately 1.2 million bpd, compared to the pre-sanctions average of 2.2 million-2.3 million bpd.
Tehran will encounter difficulties reaching its former export level soon, considering the deterioration of prices. Discounts below the public price formulas have to be offered to recapture old markets. This can be done by offering refinery clients grace payment periods.
The two OPEC countries are adamant in their positions. The political conflict will not make it any easier for OPEC to reach a consensus. Both Saudi Arabia and Iran have supporters among the other OPEC members, making an accord difficult to reach.
The most recent OPEC ministerial meeting in Vienna did not reach public agreement, leaving its decision confidential. Whatever the private resolution in the meeting was, it did not change the policies of Saudi Arabia, Iran or their respective allies.
The differences do not only lie within OPEC. Saudi Arabia wants major non-OPEC producers to cooperate with OPEC efforts to stabilise oil markets. Riyadh wants credible assurances that the major non-OPEC producers — Russia and the United States — will reduce their production.
These assurances have not been received.
The Saudi-Iranian political clash does not make these oil issues any easier to resolve.
What concerns the markets is the high production and low rate of rising demand. The market is worried, focusing more closely on the rising global crude oil storage level, both in tank farms onshore and in floating tankers offshore.
According to the International Energy Agency (IEA), global oil production increased during 2015, despite the deterioration of prices. Crude oil prices (including natural gas liquids and biofuels) increased from 93.6 million bpd in 2014 to around 96.1 million bpd in 2015. Global oil demand increased from 92.8 million bpd to 94.6 million bpd, indicating a narrower increase in demand than production.
The United States accounted for much of the global growth in oil production in recent years. US Energy Information Administration (EIA) statistics show that 2015 US oil production exceeded 2014’s total.
Total Organisation for Economic Co-operation and Development (OECD) oil stocks have increased from 91 days forward cover in the third quarter 2013 to 98 days in the third quarter of 2015. Non-OECD countries, taking advantage of the oil prices, also increased oil stocks. China, for example, accelerated deliveries to its Strategic Petroleum Reserves since mid-2014.