I take a keen interest in the political factors that affect the price of oil. OPEC policy is a huge influence on the prices of both Ultra Bloomberg Crude Oil (UCO) and UltraShort Bloomberg Crude Oil (SCO), two commodities that directly affect the fortunes of West Texas Intermediate (WTI).
Today I’m speaking mostly about Iran and Saudi Arabia. The oil economy — and the politics connected to it — is obviously a lot bigger than these two nations, but these countries are in the spotlight at the moment. It all stems from an announcement recently made by Saudi Arabia regarding its intentions for the upcoming April 17 OPEC meeting with Russia. There’s a potential production freeze on the table, but Saudi Arabia has said its participation in any production capping is contingent upon Iran’s. Why?
Iran’s True Motivations
It’s been a few weeks since Iran has said a production freeze was not a possibility. That stance was based on oil production levels from January, though, when Iran was dealing with the imposition of sanctions that are no longer in place. There were plenty of people (including Saudi Arabians) who said that it was a bad idea to set product limits based on artificially-depressed production numbers, but that’s not the only factor in play here.
Iran’s daily production was roughly two million barrels before the sanctions came down. Iran originally announced it wanted to return to that level of performance before considering any further action regarding production caps, and Saudi Arabia seemed to be in agreement.
Not much later, though, Iran went further. The country said it wouldn’t consider capping production until it had doubled its pre-sanction production capacity and reached four million barrels per day. This was a bold statement that was clearly intended to provoke some sort of response, yet it didn’t seem to get much of one at first. The rest of the oil-producing world seemed okay with this until last week, when Saudi Arabia spoke up.
Saudi Arabia’s Interests
The real story here lies beneath the statements being made overtly. Saudi Arabia doesn’t really care about Iran producing at the two million barrels level, but the same can’t be said if Iran’s production doubles any time soon.
OPEC’s behavior is largely political, especially in this case. Iran’s intention to increase their production capacity is quite clear. Four million barrels per day is an extremely ambitious target, and it probably doesn’t represent a legitimate goal. Iran’s real aim is likely to secure the right to two million barrel production along with recognition from other OPEC countries that will give it some leeway in the future.
Even though Saudi Arabia’s sudden reticence to discuss capping production seems like a firm stance, consider this: Why agree to any sort of meeting unless the country was ready to compromise? As long as Russia, Iran, and Saudi Arabia are all going to sit down together in the near future, a deal seems extremely likely.
Saudi Arabia’s announcement last week could have some other political motivations. Higher oil prices created an environment where cost-sensitive producers would be able to get back into business, but those high prices have proven to be a momentary aberration. Lower prices are actually advantageous to Saudi Arabia in many ways. They know much more of this will start causing bankruptcies, and those would be in their best interests. Their announcement may also have been aimed specifically at US producers in order to discourage any competition.
After the April 17 meeting, our best guess is that Iran will emerge with a production cap just a little bit over two million barrels per day. We’ll most likely see Saudi Arabia, Russia, and other participating OPEC nations agree to January production cap agreements. Finally, looking at the bottom line, we think the price of oil is going to rise above its latest high-water marks in the near future.