In a surprising turn of events, Saudi Arabia and Iran have found themselves in a delicate dance of diplomacy. While both nations have a history of rivalry, recent developments indicate a potential thaw in relations. However, this newfound cooperation is overshadowed by the looming challenge of Iran’s growing oil production and its impact on global crude prices.
A Diplomatic Opening
Just a week ago, Saudi Crown Prince Mohammed bin Salman met with Iranian Foreign Minister Hossein Amir-Abdollahian in Jeddah, signaling a diplomatic engagement that has caught the world’s attention. This meeting, seen as a symbolic gesture of reconciliation, was followed by another significant development—the inclusion of Saudi Arabia and five other nations, including Iran, into the BRICS economic alliance. Riyadh’s announcement of a $16 billion investment within BRICS underscored its commitment to this new partnership.
Rising Iranian Oil Production
While Saudi-Iranian diplomacy seems promising, there’s a significant factor that could test their newfound cooperation: the surge in Iranian oil production. Recent reports suggest that Iran’s oil output for August saw a substantial increase, contributing to a rise in OPEC’s overall production. Iran, a founding member of OPEC, had been largely marginalized within the organization due to sanctions imposed by former US President Donald Trump.
Sanctions’ Impact and Lack of Enforcement
Under President Joe Biden, these sanctions have seen limited enforcement, providing Iran with more freedom in its oil exports. This lack of enforcement means Iran can export oil without restrictions, much like Russia, which is also under US sanctions. Iran occasionally boasts about its oil production and exports as a show of defiance against imperial powers.
Iran’s Growing Output
According to Reuters, Iran’s oil production has surged to approximately 3.1 million barrels per day, up from an average of 2.9 million in July. This increase in Iranian production, combined with Nigeria’s addition of 20,000 barrels daily in August, effectively offsets a significant portion of Saudi Arabia’s production cuts.
Challenging Saudi Oil Policy
This development challenges Saudi Arabia’s oil policies, including the so-called “lollypop” cut—a voluntary reduction of one million barrels per day by the kingdom initiated by Saudi Energy Minister Abdul Aziz Salman. The Saudis, in collaboration with Russia within the OPEC+ alliance, have attempted to stabilize crude prices through production cuts. However, the results have been unpredictable, leading to fluctuations in oil prices.
Uncertainty in Oil Prices
Iran’s growing oil production introduces uncertainty into the oil market. While the Iranians have the potential to further increase their output, financial constraints stemming from years of sanctions may limit their expansion. However, if global oil prices reach $80 or higher, Iran could potentially discount its oil, attracting Chinese and Indian buyers who have been stockpiling Russian oil.
The Saudi-Iranian rapprochement extends beyond oil diplomacy and is part of Saudi Crown Prince Mohammed bin Salman’s larger Vision 2030—a multi-trillion-dollar development plan. Avoiding escalation with Iran is crucial for securing funding and foreign investment for this ambitious project. It also aligns with Saudi Arabia’s shift away from dependence on the United States for security.
US Response and Sanctions
In response to the Saudi-Iran engagement, the United States is pursuing its own diplomatic efforts by offering a Saudi-Israel peace deal. This move could potentially counterbalance China’s growing influence in the region and the world. However, lifting sanctions on Iran remains a complex issue, requiring negotiations akin to the 2015 nuclear deal.
The future of Iranian oil supply and the release of Iranian crude stored in Chinese ports remain uncertain. If these barrels flood the market, they could exert downward pressure on crude prices. Ultimately, the dynamics of the global oil market are shifting, and major players are vying for control and influence.
As the world’s energy landscape undergoes significant transformations, the oil market faces intriguing months ahead, with global titans navigating complex geopolitics and economic interests.
Disclaimer: This article aims to inform and does not constitute financial advice or recommendations for commodity investments. The author, Barani Krishnan, does not hold positions in the commodities and securities discussed in this article and presents diverse viewpoints for analytical purposes.