Why Saudi Arabia and Iran are dragging crude down
Saudi Arabia and Iran, political rivals in the Middle East, have pulled crude down recently. At the Doha conference on April 17, 2016, Saudi Arabia reaffirmed that it won’t commit to a production freeze without Iran. In March 2016, Saudi Arabia’s output stood at 10.2 million barrels per day (or MMbpd). Iran’s output for March 2016 was at 3.3 MMbpd. Iran’s plan to raise its crude output to 4 MMbpd puts additional pressure on the crude oversupply situation and presents added competition to Saudi Arabia’s market share in Europe (FEZ) and Asia.
Moreover, Saudi Arabia and Iran both have been engaged in Syria and Yemen on opposing sides and both are oil-dependent economies. The table below shows how Iran’s crude oil production has been increasing after secondary sanctions on it were lifted in January 2016.
Impact on crude oil as political war intensifies between Saudi Arabia and Iran
Saudi Arabia and Iran both are vital to global crude oil supplies because both have the spare capacity to increase production. Iran could ramp up production by about 700,000 barrels per day by March 2017 while the Saudi Deputy Prince indicated on April 14 that the country could increase its supply by another 1 MMbpd. The excess oil (USO) reaching international markets from these two countries could apply severe downward pressure on crude oil prices.