This is more than a diplomatic row among GCC members. Perhaps emboldened by President Trump’s visit, Saudi Arabia and its allies have declared if you are with Iran (or specific radical Sunni groups), you are against us. This effort to delineate sides in the region cannot be easily reversed without substantial outside pressure. Expect a geopolitical premium to creep into energy prices as this dispute continues.
OPEC is very much alive, and has just extended its production restraint through the rest of 2017 and the
first quarter of 2018, improving the outlook for 2017 and maybe even 2018.
Notwithstanding the pageantry of the U.S. President visiting Saudi Arabia and the enthusiasm of young Iranians hailing their moderate President’s reelection, little changed in terms of the region’s political stability, the battle with ISIS or oil policy this weekend. The clearest signal from the weekend was the public and forceful assertion that the U.S. has allied itself with the Saudis versus Iran, which can only have stoked the age-old rivalry. This should not impact OPEC dealings this week as Iran’s production is near a top, but it is likely to have repercussions down the road when (and if) Iran’s productive capacity rises.
The decision by Saudi Arabia, Russia and ostensibly the rest of OPEC to extend the production cut through the first quarter of 2018 is not a surprise, except for the addition of the first quarter of 2018. Extending through early 2018 signals that the producers understand the magnitude of the challenge. Whether they rise to the challenge depends on their success this summer. OPEC needs to do as much as possible now to temper the surplus coming in the first quarter.
At the end of 2014, Saudi Arabia, with its OPEC partners, opted to lift crude oil production and
pursue greater market share in the face of rising U.S. shale production and the expected removal of
sanctions on Iran. By the end of 2015, crude oil prices had tumbled under $40, Saudi and Iraqi
production had risen by 1.5 million b/d, a nuclear deal was indeed struck, and Iran was gearing up to
raise exports. U.S. shale producers had worked furiously to cut costs and stay in business, but their
production had finally crested and was declining. Ironically, in this market of low oil prices and
falling U.S. production, the U.S. government lifted the ban on crude oil exports.
The conclusion of the Iran nuclear deal in 2015, by the Obama Administration, was indicative of a subtle
shift in U.S. positioning vis a vis the Saudi-Iranian rivalry for hegemony in the Gulf. In a reversal, President
Trump is shifting the U.S. position back in favor of Saudi Arabia under the guise of fighting ISIS.
Early indications from the Trump Administration hint at efforts to tip the balance back towards the Saudis.
Bloomberg: October 10, 2016
“There probably will be a deal,” said Sarah Emerson, managing director of ESAI Energy Inc., a consulting company in Wakefield, Massachusetts. “They will probably succeed in raising the price if they can get production down to 33 million barrels a day.”
Washington Post: Sept 27, 2016
“The market was falling with the growing realization that there will be no effective OPEC deal, then helped along by the IEA acknowledging the glut persisting through 2017,” said Sarah Emerson…
Financial Review: Sept 21, 2016
“Oil producers are trying to talk the price higher,” said Sarah Emerson, managing director of ESAI Energy, a consulting company in Wakefield, Massachusetts. “The fundamentals are weak. The market is trading in the $US40s ……
Bloomberg: Aug 28, 2016
“This is a lot of talk,” said Sarah Emerson, managing director of ESAI Energy Inc., a consulting company in Wakefield, Massachusetts. “There are too many issues in the Arabian Gulf region for an agreement to take place.”
Investors Business Daily: Aug 15, 2016
“This is a market that was looking for a reason to buy at a low price,” said Sarah Emerson, managing director of ESAI Energy Inc., a consulting company in Wakefield, Mass. “As we get close to $50, buying should….
Bloomberg: Aug 3, 2016
“Production was down 1 million barrels a day in July from a year earlier based on weekly data, while imports were up by about 800,000 barrels,” said Sarah Emerson, managing director of ESAI Energy Inc…
FX Empire: Aug 1, 2016
The transition of the Middle East refining region into a net exporter of petroleum products has been bearish for global refined product market fundamentals in recent years. It has been a major contributor to the fall in product market “dominoes” that ESAI Energy…
HYDROCARBON ENGINEERING: July 27, 2016
During the next five years, more expansion of refining capacity in the Middle East will continue to realign global petroleum product markets. According to ESAI Energy’s recently released Five-Year Global Fuels Outlook, increases …