Escalating Tensions Between Saudi Arabia and Iran Will 'Reduce' Oil Prices

An international energy consulting firm states that escalating tensions between Iran and Saudi Arabia will further reduce global oil prices. The energy consulting institute 'Wood Mackenzie' reports that following the rise in oil prices on Monday, January 4, and the halt in price increases due to a sharp decline in the Chinese stock market, the start of the new Gregorian year for Middle Eastern politics and the oil market was accompanied by a stormy beginning. According to An-Louis Hittle, head of the macro oil research department at Wood Mackenzie, the firm predicts that excess oil supply will continue in the first half of 2016. The report indicates that escalating tensions between Iran and Saudi Arabia will lead to further reductions in oil prices. 'Considering the current conditions, the escalation of tensions between the two regional powers, Iran and Saudi Arabia, will limit the direct impact on the fundamental principles of supply and demand in the oil market, unless events occur that lead to the collapse of the Iran nuclear agreement, although this seems unlikely.' The report predicts that the decline in capital value in international stock markets will begin in the second half of 2016 and will accelerate in the last quarter of the year. Given the imbalance between supply and demand in the oil market, political risks will play a decisive role in oil prices. 'Unlike the beginning of 2015, when the growth of oil supply from non-OPEC countries was increasing and reached a record of 1.4 million barrels per day, the growth of oil supply from non-OPEC countries at the beginning of 2016 has sharply decreased compared to the same time last year.' The report continues that the increase in regional political tensions at the beginning of 2016 and the decrease in oil prices over the past 18 months have reduced the global oil industry's ability to influence supply. The report adds that Saudi Arabia will continue to strive to gain a larger share of the oil market in 2016 and 2017, and the likelihood that Saudi Arabia will reduce its production to allow Iran to regain its lost share in the oil market is very low, unless other producers, including Russia, Iraq, and Iran, also agree to cut their production. Since the OPEC meeting in 2014, Saudi Arabia has consistently stated that it has no intention of reducing production to support oil prices. The recent increase in tensions between Riyadh and Tehran strengthens the likelihood that Saudi Arabia will refuse to reduce its production to help Iran regain its lost share. '2015 was the most stagnant year' The report adds that unlike 2015 and despite developments in the oil market, it is expected that transactions in the upstream oil and gas industries will increase in 2016. If oil prices continue to decline, companies will be forced to sell shares and merge business activities to free up capital, reduce costs, and navigate financial crises. If, according to Wood Mackenzie's forecast, oil prices recover in 2016 and in the fourth quarter the price of Brent crude exceeds $65 per barrel, companies will quickly focus on economic growth instead of trying to survive in difficult economic conditions. According to this international energy consulting firm, 2015 was the most stagnant year for merger and acquisition activities in the oil and gas industry in the past decade. On average, transaction statistics in this year decreased by more than one-third compared to the previous two years. Excluding the exceptional $82 billion acquisition of BG Group by Shell, the costs spent on transactions during this period decreased by two-thirds. While in 2014 only 46 transactions worth over a billion were conducted, last year only 14 contracts were signed. Luke Parker, a research official at Wood Mackenzie, states that uncertainties in oil prices have increased the gap between buyers and sellers and have also maintained the downward trend in oil and gas industry activities that began in October 2014. Mr. Parker believes that regardless of what may happen to oil prices in 2016, sellers and buyers will be pressured to increase their activities. Parker said that if the current depressed conditions in pricing continue, the amount of proposals for investment and business activities will increase in 2016. Due to increased financial pressure on potential sellers, this year will see different factors and types of transactions. According to Parker, increasing poverty will expose more companies to sale, and investment options will be more limited. Compared to the first quarter of 2015, investors will show less willingness to finance companies. Wood Mackenzie also warns of the potential increase in vulnerability among operators, adding that while top-tier international oil companies can take measures to withstand further price declines, companies in lower tiers will have fewer options. Therefore, the need for deeper strategic actions, including asset sales, will increase.