Weak demand, surplus supply hurt Saudi producers but falling oil prices deal a bigger blow for Tehran.
Today stands to be a momentous day for oil. It is, after all, the self-imposed deadline for sealing a deal between Iran and six big powers -- Britain, China, France, Germany, Russia and the United States – that would ease the crippling economic sanctions on Iran in exchange for putting the kibosh on its plan to build a nuclear bomb.
Oil prices fell on Monday in anticipation of an agreement, with traders reasoning that Iran would be allowed to more than double its oil exports, feeding a glut in global supplies that has halved the price of oil over the past year.
But traders are looking at the wrong producer. One of the most important actors in this drama isn’t even at the table in Lausanne – Saudi Arabia, the world’s biggest producer and exporter of crude. Saudi Arabia believes it, more than even Israel, has the most to lose from a nuclear Iran. And like Israeli Prime Minister Benjamin Netanyahu, who traveled to Washington earlier this month to kvetch to the U.S. Congress, the Saudis don’t believe the deal is tough enough to deter Tehran’s hardliners. They’re likely to keep punishing Tehran by letting crude prices slide even lower.
How low? How about another 50%, to $25 a barrel? As my colleagues at Barron’s have argued, $20-something oil is coming.
Oil already faces a perfect storm of weak demand and excess supply. I sat down this week with Citigroup’s head of commodity research, Ed Morse, who said that slowing demand in Europe and China is offsetting rising U.S. oil consumption. And demand is likely to ebb further in the next few months as winter yields to spring. Add to this a shortage of storage for excess crude supplies and prices could fall fast unless the Saudis trim production to arrest the slide.
They won’t.
Hold on a minute, regular readers may say. Hasn’t this column said before that low oil prices are squeezing the Saudis, too? Absolutely. While pumping oil costs Saudi Arabia next to nothing, it needs to be able to sell its crude for at least $90 a barrel to offset its swelling budget expenditures, placate its poorest citizens and pay off the ruling house of Saud’s expanding number of offspring living off petro-dividends. Funding its budget deficits means dipping into its $753 billion sovereign wealth fund.
But Saudi Arabia has what it would call a growing Shia problem. Those familiar with the region will already know that the Saudis are Sunni Muslims; Iranians are Shia. They’re both variations on Islam, but like Protestants and Catholics in Northern Ireland, they’re not about forgiving or forgetting. Saudi Arabia has the additional problem of being home to Islam’s two holiest cities, making it the end zone for any fundamentalist Islamic movement....MORE
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