Opinion
9 Feb 2016 10:44am

What's next for oil prices?

“In the Middle East’s turmoil, Russia, Saudi Arabia and Iran have every reason to want the oil price higher”

Do oil producers really want peace in the Middle East? The fear of China’s slowdown has shaken the world. The price of oil has fallen further; Brent crude, the global benchmark, went below $28 a barrel in mid January for the first time since 2003, driven too by Iran’s storming return to the world oil markets after international sanctions were lifted earlier than expected. Surely that marks the end of the era of high-priced oil?

Maybe not. Forecasts vary hugely, from Goldman Sachs and Morgan Stanley predicting that crude prices could fall to $20 a barrel, to Fitch reckoning we may see a steady rise to $70 in 2018 and $75 after that. In making sense of that range, we should remember that three oil producing giants with much at stake in the Middle East’s many-sided turmoil – Russia, Saudi Arabia and Iran – have every reason to want the oil price higher.

That isn’t what has driven the new conflicts between Riyadh and Tehran; desire for influence as much as religion – the gulf between the Sunni Islam of Saudi Arabia, and the Shia Islam of Iran – are the prime causes. And the forces which have driven the price of oil down from its all-time high (for Brent) of $145.61 in July 2008, and from $110 in 2014 are too big to overcome competition from fracking as well as China’s slowdown and Iran’s return to the markets. After US and UN inspectors agreed that Iran had complied with orders to dismantle some of its nuclear programme, the head of its national oil company gave the go ahead for increasing output by 500,000 barrels a day. Stores around the world are now bursting.

But the Saudi-Iranian clash may yet produce further spikes in the price while Russia has an even more desperate interest in any price rise it can get.

Saudi Arabia’s execution of the Shia cleric Nimr al-Nimr in January is a case in point. This was a predictably provocative act, which led to a furious response from Iran, and the trashing of the Saudi embassy in Tehran; it also caused the oil price to jump by several dollars. Al-Nimr, a firebrand cleric based in Saudi Arabia’s Eastern Province, a region with a large Shia population and home to most of the country’s oil production, had long been a critic of the House of Saud, calling for open elections. His execution is part of a newly-antagonistic approach from Saudi Arabia towards Iran.

Many see in that Saudi concern about US support for Iran since last year’s deal to curb its nuclear programme (although the US muddied the waters in January when it imposed fresh sanctions over a recent ballistic missile test; this move came very shortly after international nuclear sanctions on Iran were lifted).

They also see the touch of Mohammed bin Salman (“MBS”, in diplomatic circles), the deputy crown prince in his early 30s, who is also defence minister. The new, active foreign policy is very different from several years ago when the Saudi attitude was “leave us alone and we’ll leave everyone else alone”.

In Yemen and in Syria, Saudi Arabia and Iran are backing different sides in what is almost an overt clash between the two nations. Only two years ago, analysts liked to call the tension between them “the new Cold War”; now, it has turned hot.

It would be wrong to say that trying to get the oil price higher is part of those calculations – but both will welcome the result. Saudi Arabia’s oil policy has been driven for years by a determination to keep up its share, however much the price fell, yet the fall has now brought real pain. In the past month, subsidies on fuel products within the kingdom have been cut. Foreign reserves are at a three-year low and will support only five more years of current spending, analysts reckon.

Meanwhile Russia will struggle to get economic growth at anything less than $60 a barrel (the official figure, though the real one may be higher). In propping up the Syrian regime of President Bashir al-Assad it is mainly seeking a regional base, but that also gives it the chance for meddling or even undermining peace.

Those desperately trying to broker a deal in Syria and Libya cannot forget that three of the biggest players are not just jostling for power; they benefit from every clash that drives the oil price higher and stand to lose financially from peace.


Bronwen Maddox is editor of Prospect magazine


 

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