Post-Doha: Whither Oil Prices?


What do you expect from the OPEC meeting on Sunday, and will there be any surprises?  

Panel Discussion

Dr. Albert Bressand
Albert Bressand EXPERT

At the center of the Doha meeting on April 17th are the only two countries in a position to significantly raise production in 2016 at present price levels, Saudi Arabia and Iran.  Meanwhile the elephant in the room… is not in the room- namely the US unconventional oil and gas companies that accounted for the largest share of the recent rise in oil production. The special case of Iraq aside, most other players, Russia included, are producing at the frontier of their technical, political or managerial capacities.

Of the three key players, Saudi Arabia is the one holding the trump card and I see Doha unfolding on Saudi terms, either toward the Saudi-preferred solution or toward a negative result that will deliver some of the non-oil objectives that loom high on the Kingdom’s agenda.

With OPEC long since dis-functioning, I see Doha as a meeting to decide what countries, among a much wider set, should be in the post-OPEC cartel around Saudi Arabia and its GCC allies. Being in the cartel means abiding by Saudi terms, which include both a ceiling on prices to limit the slippage of production toward North America and renewables, and a ceiling on the post-sanction increase in Iranian oil revenues. A cartel exists not only through the high prices that its success can ensure but through low prices that the cartel leaders are in a position to inflict upon all, themselves included, to enforce their terms.

To make a long story short, a positive conclusion will see a limit on the rise of Iranian exports that, together with the broader demand-supply balance, will keep Iranian revenues not too far from where they were under sanctions. I think this means oil prices around or just below $50, with spikes a bit above that level but not sustained.

A failure to agree on the rules for post-OPEC cartelization will see Iranian exports double in a short period but Iranian revenues fall compared to the sanction period due to lower prices.  Investment in Iran will slow down as Saudi will encourage a fight for market share. To do this, the Kingdom can mobilize both its massive spare capacity and its war chest of partial privatization of Aramco’s non-sovereign operations. Prices would then hover around $40 with possibly punitive spikes below. 

Robert Madsen EXPERT
The last few years have been difficult for Saudia Arabia. The emergence of new hydrocarbon producers in North America and elsewhere presaged a decline in the market shares of existing producers. Even worse, the withdrawal of US forces from Iraq necessitated greater Western cooperation with Iran, including an expansion of Teheran’s influence into eastern Iraq, tacitly coordinated military actions against ISIS, an agreement that effectively allows Iran to develop a nuclear bomb several years from now, and the removal of contraints on Iranian oil exports. The shifting balance of power manifested in, among other things, proxy conflicts between the Riyadh and Teheran in Yemen and Syria. 

A decline in global economic growth and hence in demand for oil played a part in the recent price collapse but so too has Saudi policy. Riyadh is clearly trying to cripple the new, relatively high-cost frackers in the United States but also to advance its regional agenda. Demanding that Iran freeze or limit its oil output now that sanctions have been lifted is nonsensical because Iran wants additional revenues and can, over time, deploy considerable capacity. But in the short term, at least, maintaining a price in the forties or even lower serves Saudi Arabia’s geopolitical interests. It reduces the income Iran can earn from any given level of output, thereby marginally retarding its geopolitical and economic gains, and harms Syria’s patron, Russia, while also returning the Kingdom to the front pages of the world’s newspapers. 

The problem is that this strategy is probably unsustainable and possibly even Pyrrhic. The present price level hurts many countries that rely on oil revenues, including prominently Venzuala and Nigeria but also several of Saudi Arabia’s closest allies in the Gulf, whose government budgets have moved into the red. Even Riyadh’s national debt is now under review by the credit rating agencies. Meanwhile the breakeven point for many frackers and other marginal producers will decrease and Iran’s production capacity and exports will rise. At some point, therefore, Saudi Arabia will have to accept an expansion in Iranian market share and seek a cooperative agreement that increases revenues to it and other Gulf producers—perhaps at a price level still uncomfortably low for Russia, North American suppliers but not debilitating to Teheran. For Iran’s return to the oil market and its emergence as a much more powerful player in the Gulf and the broader Middle East are both foregone conclusions.


Thanks for your comments Robert. The Doha outcomes fits my second scenario and highlights the importance of Saudi being in a near war with Iran and ready to cross quite a few lines to contain Iranian power.

The statement by Prince Mohammed bin Salman (also chair of the Supreme Council of SAudi Aramco).made public oon saturday gives three levels of production KSA could achieve (1mbd more immediately, 12.5mbd in 6 month---this is the official prod capa) and for the first time, a reference to the t20mbd KSA could reach if its policy became to montetize all low-cost resources. This will not happen for reasons too long to explain but merely invoking it is akin to parading nuclear-tipped missiles in the OPEC virtual alleys.

Expect significant decline, and talks about possible deal in June to manage it it.
I actually agree with you. My tendency is to look at this through geopolitical lenses as well. Perhaps I overcompensated which is not necessarily bad.

Ultimately, I think it will be very difficult for Saudi Arabia to “contain” Iran. Reduce revenues and slow geopolitical growth, yes, but I can’t imagine that the kingdom can retard Iran’s rise by more than a year or two. Do you think the Saudis would actually attempt a military confrontation with Iran? My hunch is that the chances of success in such an endeavor are vanishingly small.
Quick reaction is that your first part and mine are very much aligned. Then you looked at what the proper business strategy for KSA would be--and I agree on that but I personally think that the wars trump the financial logic and that containing Iran will be given greater weight. Which is why I look at Iranian oil revenues, not market share. But the two logic--finance-driven or war and containment driven--are both plausible. Will be interesting to see which seems to prevail.
FYI on Bloomberg, Saudis Stick to Oil Freeze Ultimatum as Iran Stays Home By Wael Mahdi, Golnar Motevalli, Mohammed Sergie, Bloomberg.