The Middle East’s 2 Great Powers, Iran & Saudi Arabia, Are Heading For A Showdown Over Oil Prices

On Monday, December 7th, the price of oil per barrel fell to its lowest level in almost seven years, as a result  of the Organization of Petroleum Exporting Countries (OPEC)  inertia regarding the plethoric offer at global level.

Light sweet crude’s (WTI) per barrel price fell to the lowest closing level since February 2009 on Monday, following the cartel’s decision.

Caption : Nasdaq

Until now, markets had counted on the members of OPEC’s cartel to try to slow down the profusion of the offer or at least to reach a minimum agree between them, even if the hope of a possible reduction of OPEC’s  production quotas diminishes from day to day.

However, OPEC has decided to maintain its offer at unchanged levels, without setting even a calculated target. The fact that certain countries derogate for ages the limitations which are aligned to them is not maybe totally strange to the current image of oil affairs around. Certainly, it is a secret to nobody that the ceiling of global production of the cartel is a theoretical one as cartels are not allowed. According to various studies the real production of OPEC’s countries is indeed situated at present near 32 million barrels a day (bpd), and  anyway the group’s ceiling of 30 million bpd has largely been symbolic and, in practical terms, ignored.

Venezuela in head and most of OPEC’s members of the cartel, seemed at first sight ready to decrease the global level of their production to send a bullish sign to the market, but when it comes to make clearly an individual decision, it is no more the same affair.

The Iranian Return to the Market Affairs, Possible Impact on Saudi Arabia and Russia’s Exports?

Within one year, OPEC has already lost 450 billion dollars of income even though it has never before produced so much oil, in order to try to suffocate  rival productions, in particular that of the United States — however — the measures pursued up until now have not worked so well…

From now on, the market also has to count on Iran’s return, which considers good to take advantage of the current fallout effect of the global oil basket when levying of the western sanctions takes place.

Former customers in southern Europe already have shown an interest in resuming purchases of Iranian oil.  Hellenic Petroleum SA is “in the process of initiating a dialogue” with Iran’s national oil company, as are “most western companies,” Vasilis Tsaitas, a company spokesman, said by e-mail. Hellenic operates three of the five refineries in Greece with total capacity of 341,000 barrels a day, according to its website.

“Iranian crudes will definitively be again another alternative to consider” if sanctions are lifted, Ignacio Rodriguez-Solano, a spokesman for Cia Espanola de Petroleos SAU, said by e-mail. The company runs three Spanish refineries with a total capacity of around 520,000 barrels a day.

Shipments from Iran used to account for as much as 30 percent of Hellenic’s crude needs and as much as 15 percent at CEPSA and were partly replaced by Russian exports after sanctions were imposed, according to the companies.

Saudi Arabia has started shipping crude to traditional Russian markets like Poland and Sweden, but supplies to Europe from the world’s largest exporter won’t increase by enough to reduce prices, said Texas-based consultant Stratfor. In contrast, a surge in Iranian exports after the lifting of sanctions could erode the value of Russian shipments to the region as soon as next year, according to KBC Advanced Technologies.

Only Saudi Arabia could restrict its production in order to counterbalance the Iranian arrival. Saudi Arabia’s oil strategy since last year was to flood the market, to defend its market share while facing the shale oil increased production from the U.S., according to EIA.

Riyadh would be ready from now on to accept an OPEC reduction of 1 million barrels. Provided, however, that the other OPEC’s members show a bigger discipline and that the non-member petroleum exporting countries of the cartel, such as Russia, make a gesture as well.

Yet, rather than closing ranks, OPEC is finding that an intensifying battle for market share, worsened by deep regional differences between Saudi Arabia and Iran, is driving it further apart.

Halfway through last week’s ‘s six-hour meeting, an unexpected dispute erupted over the defining feature of the cartel. In a move that sources say was masterminded by Saudi Arabia, ministers finally agreed for the first time in decades to drop any reference to the 13-member group’s output ceiling. This appeared to be a direct response to Saudi Arabia’s arch-rival Iran and its return to the oil markets.

Searching Into Geopolitical and Religious Causes

Nonetheless, the present Sunni-Shia conflicts setting Saudi Arabia and Iran at each other’s throats — particularly in Syria and Yemen — make the relationship between the two OPEC powers even more fraught.

“The fact that Iranian-backed Houthi militants are squaring off against Saudi-led troops in Yemen is not helpful, as increased Iranian oil revenues are likely to find their way to Iranian military interests in Yemen, Iraq, and Syria,” Aberdeen Asset Management’s investment strategist Robert Minter said.

Hence OPEC is setting up for a showdown at the corral, he added, as Iran wants its pre-sanction market share back, and the Gulf states are not inclined to cede volume when they are already feeling the budgetary pain of reduced prices.

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Ronis Sofroniou is the author of Eyes on Europe & the Middle East and  was born in Limassol, Cyprus, and studied Human Resources Management and French Language at Montpellier 3 University (2007) and granted with a Master’s degree in Oil and Gas Management from Abertay Dundee University in 2014. He worked at the Cypriot Embassy in Paris in 2009 and just after as a B2B salesman person in the smartphones market for some years.  Currently, he lives between France and Cyprus where he works as a  French teacher, Interpreter, Career Advisor at the Cypriot Ministry of Defense and as Independent Distributor for Herbalife.