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Crude Economics
Iran Deal Tests OPEC’s Breaking Point

Fissures are widening between Saudi Arabia and the rest of OPEC. Though the Saudis can afford to ride it out, countries like Algeria, Nigeria, and Venezuela are all too aware of the havoc today’s bearish crude market is wreaking on their national budgets, and they’d like to see OPEC collectively cut production and send oil prices back up. Libya is the latest to publicly agitate for OPEC action, Reuters reports:

“OPEC members, as a unit, need to re-evaluate their strategies,” Samir Kamal, Libya’s OPEC governor and head of planning at the North African country’s oil ministry, told Reuters by email.

They “need to reach an agreement to bring down the production levels by at least 800,000 barrels a day, especially now that an agreement has been reached with Iran which is expected to increase its production”, he said.

But Saudi Arabia—the cartel’s largest producer and likely source of any such drawdown in output—is intent on staying the course in its fight with American oil producers for market share. And with a sovereign wealth fund totaling nearly three quarters of a trillion dollars, the Saudis can afford to run the kinds of budget deficits that $50-per-barrel crude is bringing. The rest of OPEC isn’t so well prepared.

Moreover, thanks to the Iran deal, the global oversupply causing the price plunge will only get worse. As Western sanctions are lifted, Iranian oil production is set to expand by 300,000 barrels per day (bpd) in the sort term and, eventually, 800,000 bpd. That means oil prices could drop further, and every OPEC member not named Saudi Arabia is spooked. But it’s hard to see Riyadh acquiescing to production cuts that would effectively cede precious market share to its chief regional rival. Bloomberg reports:

“I don’t see Saudi Arabia moving even a notch,” Eugen Weinberg, head of commodities research at Commerzbank in Frankfurt, said by e-mail on Tuesday. “Why should they? They would be giving up their market share to their arch rival. This situation will put OPEC on the brink again.” […]

“The real discussions within OPEC will be when Iran is fully back,” Olivier Jakob, managing director of Zug, Switzerland-based consultancy Petromatrix GmbH, said by phone on April 6. “Because then Iran will ask the other OPEC members to cut production in order to make some room for them. That’s when OPEC will need to make some decision on how it wants to function as an organization.”

OPEC is scheduled to meet in June, and the recent Iran deal (and what it means for the rest of the cartel’s members) will surely feature in those discussions. The last thing the world’s petrostates want to see is a new bump in supply contributing to the global glut, but it appears that’s exactly what they’re getting.

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  • rheddles

    But Saudi Arabia is intent on staying the course in its fight
    with American oil producers for market share.

    Saudi Arabia is not fighting American oil producers. It is fighting Houthis and their Iranian masters. Thinking the center of the universe is Houston is a grave error.

    • Kevin

      Two birds with one stone from Riyadh’s POV.

  • Andrew Allison

    At the risk of being repetitious, this post explains exactly why the Saudis are not cutting production, namely in order not to lose market share to other members of OPEC, of which the US is not one. The Saudis have made their position perfectly clear: they will only cut production when the rest of OPEC does, not before.

  • Brett Champion

    This post is overly optimistic in its assessment of Saudi Arabia’s ability to keep this up. The Economist is estimating that Saudi Arabia is going to run a budget deficit this year of nearly $80 billion, or a little over 10% of GDP. Not even Saudi Arabia has the wherewithal to keep that up for more than a few years. And all signs are currently pointing to a continuing soft oil price due to economic slowdown in China and a ramping up of production in Iran. Not to mention that the whole market-share issue could turn decidedly negative for the Saudis if the US ever ditches its idiotic export ban on oil.

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