Struggles Between Tehran and Riyadh and the Global Oil Market

The surge in global oil prices was short-lived, and the price of this commodity has once again started to decline. The struggle between Iran and Saudi Arabia over oil supply is one of the most important factors that has turned the hopes of 'black gold' producers back into despair. Other factors have also contributed to this zigzag movement. In a meeting held last February in Doha, the countries of Saudi Arabia, Russia, Venezuela, and Qatar decided to 'freeze' or stabilize their production at January 2016 levels, with the aim of stopping the fall in oil prices and even creating conditions for a rebound. This quadrilateral agreement was significant for two reasons. First, it was the first time since the beginning of the free fall in oil prices from mid-2014 that producer countries decided to impose a ceiling on their production to stabilize the market. The second reason was the cooperation of three OPEC members with Russia, a very important oil power that is not part of the organization. In other words, the agreement to influence the market extended beyond the 'OPEC' framework to include 'non-OPEC' countries. This event itself heralded the emergence of a new season in 'international oil diplomacy'. Following the Doha meeting, efforts to expand the scope of the quadrilateral agreement continued, and it was ultimately decided that another meeting would be held on April 17 with the participation of twelve OPEC member countries and three non-member countries (Russia, Oman, and Bahrain) in the Qatari capital. Given these initiatives, the idea gained traction in the markets that oil powers (especially the two giants, Russia and Saudi Arabia) no longer wanted to sit idly by and passively watch the oil market's decline. This was one of the factors that revived oil prices, which surged by 44% from $29 per barrel to $42 per barrel between mid-January and mid-March. However, other factors also contributed to this surge, particularly interruptions in oil production in Iraq and Nigeria. Relying on an increase in oil prices, at least until the end of this calendar year, does not seem very logical. It should also be noted that when oil prices fell below $30 per barrel, several unconventional or 'shale' oil fields in the U.S. ceased operations. These fields will resume operations with a rebound in oil prices, further increasing supply. This phenomenon also hangs over the global oil market like a 'Damocles' sword. However, initial calculations regarding the upcoming Doha meeting did not last long, and traders concluded that OPEC and non-OPEC countries were not in a position to make significant changes in the prevailing recession in the global oil market. This change in calculation caused Brent crude oil prices to slide again, falling to $38 per barrel on Monday, April 4. The change in market calculations and the renewed decline in oil prices stem from two important factors: First, the very high level of oil supply. In the February meeting in Doha, as mentioned, four producing countries decided to freeze their production at January 2016 levels. The upcoming meeting of oil producers in Doha, which will be held on April 17, is likely to accept the freeze at the same previous level at best. A freeze at this level will not achieve anything because the market is currently suffering from oversupply, which is the main source of the recession. The official production ceiling of the twelve OPEC members is 30 million barrels per day, while the members of this organization produce 33 million barrels per day. Russia, which has joined OPEC members to regulate the oil market, has raised its production to 11 million barrels per day for the first time in thirty years. Currently, oil supply is 1.5 to 2 million barrels per day more than demand, and if oil production is to be frozen at current levels, expectations for a rebound in prices will be futile. The second very important factor that has once again placed oil prices on a downward slope is the struggle between Tehran and Riyadh. The Iranian Ministry of Oil does not rule out Iran's participation in the April 17 meeting in Doha, but at the same time reiterates that it has no intention of freezing its production at January levels. Bijan Zanganeh, Iran's Minister of Oil, states that he will definitely attend the Doha meeting on April 17 if he has time. Mr. Zanganeh considers the quadrilateral agreement of February among OPEC and non-OPEC countries as a positive step towards freezing oil production, but sees no reason for Iran to join this agreement. He and his colleagues emphasize that during the sanctions period, other oil-producing countries took advantage of the situation and captured Iran's export share to their benefit. In this situation, if Iran freezes its production at January levels or even at current levels, it will effectively legitimize the loss of its quota. Iran's official position is to raise its production to four million barrels per day by the end of this calendar year and regain its traditional markets. Tehran's stance has met with a strong reaction from Riyadh. In an interview with Bloomberg, Mohammed bin Salman, the Saudi Crown Prince, warned that his country would only agree to freeze production if other producing countries, especially Iran, participate in this action. Under these circumstances, relying on an increase in oil prices, at least until the end of this calendar year, does not seem very logical. It should also be noted that when oil prices fell below $30 per barrel, several unconventional or 'shale' oil fields in the U.S. ceased operations. These fields will resume operations with a rebound in oil prices, further increasing supply. This phenomenon also hangs over the global oil market like a 'Damocles' sword. Considering all these factors, it seems unlikely that oil prices will rise above the $30 to $45 per barrel range by the end of 2016. The struggle between Tehran and Riyadh over the future of the oil market, which is closely related to existing tensions between the two capitals over strategic issues in the Middle East and religious conflicts between them, is likely to continue for a long time. Data released by Iran and international sources indicate that following the start of the sanctions relief process, Iran's oil production and exports have begun to increase, albeit at a slower pace than expected. According to the latest available data, Iran's crude oil production currently stands at 3.2 million barrels per day, which is 300,000 to 400,000 barrels per day more than last year. At the same time, various sources report Iran's oil exports at two million barrels per day. Following the lifting of sanctions, Iran has significantly increased its exports to India and South Korea and is also exporting oil to France and Spain. Given that about 1.8 million barrels per day are sent to domestic refineries for internal consumption, only 1.4 million barrels per day remain for export. In this case, how is Iran's export of two million barrels of oil possible? The answer is that part of the exports is not from production but from the amount of oil that was stored in warehouses during the sanctions period. On the other hand, the Iranian Ministry of Oil also counts gas condensates among its oil exports, while Iran's customs classify these condensates as non-oil exports. The result is that Iran's current oil production is 3.2 million barrels and its oil exports are two million barrels per day. According to assessments by some independent Iranian experts and international sources, it seems unlikely that Iran will be able to raise its production above 3.5 million barrels per day this year. Iran's transition beyond the four million barrels per day mark, and especially achieving the country's target of five million barrels per day, which is set for the medium term, requires attracting a significant volume of foreign investment.