Friday,
August 24, 2018 12.58PM / By Irina Slav for Oilprice.com
When OPEC and Russia shook on increasing crude oil production by a million
barrels daily to stop the oil price climb that had begun getting uncomfortable
for consumers from Asia to the United States, there was no sign of what was to
come just two months later: slowing demand in Asia, ample supply, and a brewing
price war between Saudi Arabia and Iran.
Saudi Arabia, Iran's arch-rival in the Middle East, has been a passionate
supporter of President Trump's intention to pull out of the nuclear deal with
Iran and reimpose sanctions. This support is not simply on ideological or religious
grounds, it also has a purely economic motive: the less Iran crude there is for
sale, the more consumers will buy from Saudi Arabia.
Iran, however, is not giving up so easily. It has more to lose, after all, with
the harshest sanctions yet coming into effect in the coming months. The first
shots in this war were already fired: Saudi Arabia cut its selling price for
oil shipped to all its clients except the United States, S&P Global Platts reports in a recent analysis of OPEC. Iran did the same and
has indicated that it is prepared to do a lot more if any other producer
threatens its market share. In fact, statements from senior government and
military officials suggest that Iran is ready to go all the way to closing off
the Strait of Hormuz.
While
analysts argue whether Iran's threats have any teeth, oil demand news from Asia
is giving OPEC another cause for worry. Slowing economic growth is dampening
oil demand growth and both the Chinese yuan and the Indian rupee are falling
against the dollar as a result of the economic developments in both Asia and
the United States, whose economy is growing so fast that some are beginning to
worry that it will soon run out of steam.
So, OPEC's internal fractures are deepening and likely to deepen further
because Saudi Arabia and Iran are highly unlikely to put down their arms, even
if it means cutting prices to uncomfortably low levels. Saudi Arabia could
boost its production. According to Platts, it has the biggest portion of OPEC's
combined spare capacity. Iran is not really in a position to do so, what with
exports already falling and expected to fall further as the November 4 start of
the sanctions approaches. Yet Iran has made clear that it will not stop
exporting oil and China, for one, has made clear it will not stop buying it.
China and India, unsurprisingly, are shaping up as the battleground for Saudi
and Iranian crude as two of the world's top oil consumers. While India has
suggested that it will try to comply with U.S. sanctions, China has stated the
opposite. So, India could up its Saudi oil intake, but whether China will do so
will depend on prices. Again, Iran has more to lose, so it might be willing to
go further than Saudi Arabia. And the Saudis cannot go too far: they have huge
financial commitments under the Vision 2030 reform strategy and they are
already extending themselves with major investment projects at home and abroad.
A price war between Saudi Arabia and Iran could effectively put an end to OPEC.
Iran has already voiced its strong opposition to the reallocation of individual
member quotas suggested by Saudi Oil Minister Khalid al-Falih. According to his
Iranian counterpart Bijan Zanganeh, this threatens its market share.
Both are expected to attend a meeting of the Joint Ministerial Monitoring
Committee that was set up to monitor the production cut deal struck with Russia
in 2016. It's hard to imagine Saudi Arabia assuring Iran that its market share
won't suffer any consequences from its stated pledge to fill any supply gap
left by a cut in Iranian exports resulting from the U.S. sanctions. It's also
hard to imagine Iran shrugging and letting this go. Could OPEC be on the way
out? Maybe.
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