Tehran, Riyadh destroying OPEC

Tehran, Riyadh destroying OPEC
21:07 5 Yanvar 2016
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Baku, Azerbaijan, Jan. 5

By Vagif Sharifov – Trend:

Iran and Saudi Arabia, who seek to hold leading positions in the Middle East in particular and in the Islamic world in general, openly conflict with each other - only the second time for the last 30 years.

The relations between them were positive in 1960s-1970s and have deteriorated after the revolution in Iran. The relations greatly deteriorated in July 1987 when Iranian pilgrims staged a demonstration in Mecca in support of Tehran. This resulted in clashes with Riyadh’s police and death of 275 Iranians. Afterwards, the relations between the countries were inconsistent and resumed only after a long time.

One of the spiritual leaders of the Shiite minority in Saudi Arabia was executed there in early 2016. He was sentenced to death in 2015 for disobeying the authorities, inciting riots and resisting police. In response, protesters set fire to the Saudi Arabian embassy in Tehran.

The conflict with Saudi Arabia, which recently has been holding a principled position in the hydrocarbon export volume, occurred amid the supply of the first batch of oil by Iran to the EU in January.

OPEC’s policy, in which Riyadh has a leading position, has, for the last several years, included the maintenance of low oil prices to expand its own share on the global market through dumping.

By supplying the first oil to the EU, Iran joined the fight for the European market. The US appeared on this market in January. In principle, such a supplier as Tehran is unfavorable for the US. The conflict between Iran and Saudi Arabia caused a short-day rise in oil prices up to $38.4 per barrel on the ICE in London.

Later, the prices began to fall again. Brent Dated Spot cost $36.5 per barrel Jan. 4. By the way, a similar situation with oil prices occurred in July 1987 when the first evident conflict occurred between the two countries. Back then Brent price increased to $20.65 per barrel compared to $19 preserved on average since early 1987. The price has reached $18-19 per barrel again since mid-August, when the peak of the conflict passed.

The European banks have predicted this week that the oil price will drop to $30 per barrel in the first six months of 2016 due to the excess supply. Such a "glut" can be created by Iran and the US. It can be supported by Saudi Arabia and Russia, which will not want to give away its traditional sales markets.

Saudi Arabia and Bahrain broke off the diplomatic relations with Iran. The fact that Saudi Arabia and Bahrain are Tehran’s partners in OPEC - the organization seeking to maintain the world oil balance at an effective level for everybody, is noteworthy.

During the last period, which has been observed for many years, and this fact is recognized by many large Western experts, OPEC has ceased to perform its primary function, "sliding down" to a commercial company, which serves the interests of certain countries. The conflict between Tehran and Riyadh will certainly have a negative impact on the internal structure of the OPEC and the cartel’s implementation of its quotas for the supply of oil to the world market.

Iran can continue to supply oil to the EU on near-market conditions to ensure quick fast foreign currency earnings and obtain a market share as long as economy of the state budget allows it to do so, and Saudi Arabia will continue to fight with Russia for old and new customers.

The US will also supply oil until the world price is less than the break-even price of supplies. The significant decline in oil prices will reduce investment in the industry, cut jobs in the world economy, which will constantly decline. Looking at the history of oil industry over the last 60 years, one can notice that namely after bringing the situation to such absurd, the prices began to rise until their values tripled.

First of all, the prices may increase in reaction for the potential threat of failures in supply of raw materials via the Strait of Hormuz, which is of strategic importance to the world market, through which one-third of the world’s maritime oil supplies pass. The northern coast of the strait belongs to Iran, the southern – to the United Arab Emirates, which have lowered the rank of its embassy in Tehran as a result of the recent conflict.

For temporary diversification and security of oil supplies to the world market, Iran can potentially start a transportation through Azerbaijan, which has an extensive network of oil pipelines. Technically, Iran can deliver its oil to Baku via the Caspian Sea or railway with a view to its subsequent export via the Baku-Tbilisi-Ceyhan (BTC) pipeline with access to the Mediterranean Sea. However, the economy of such deliveries should be seriously studied, especially against the background of low global oil prices.

Thus, on one hand, a mess in the OPEC may lead to uncontrolled oil supplies to the global market, which would reduce oil prices to historic lows, on the other hand - the deliberate blocking or, at least, a threat of restrictions in the Strait of Hormuz with the further development of the conflict may cause an increase in oil futures prices.

Vagif Sharifov is an analyst, expert in oil and energy markets.

Follow him on Twitter: @VagifSharifov

Follow us on Twitter @TRENDNewsAgency

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