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The Battle Is On: The Saudi-Iran Oil Proxy War Heats Up With Bin Salman’s Consolidation Of Power

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The emergence of Deputy Crown Prince Mohammed bin Salman as a powerful leader in King Salman’s Saudi Arabia is a phenomenon that demands attention. King Salman has given him the authority to steer the country’s economic policy, coordinate national defense, and, recently, to render final decisions regarding the oil sector.

enter image description hereSaudi Arabia’s deputy crown prince Muhammad bin Salman

The deputy crown prince was the strongest Saudi voice at Doha, insisting that Saudi would not participate in an output freeze unless all OPEC members, including Iran, did so. Ali Naimi had before the meeting given indications that he supported a freeze deal. He was overruled.

Bin Salman: The Architect

An often overlooked but key detail in the developments over the last year or so is the fact that Bin Salman is Saudi’s defense minister and the architect of the country’s economic policies and strategies. He has also proven himself to be a heavyweight in the oil sector, as the Doha outcome made clear. And now he has a loyalist in the oil ministry.

Enter Khalid al-Falih, who was appointed as Ali Naimi’s replacement on Saturday. He has earned the loyalty of the crown prince, according to various reports, and will likely pursue policies in keeping with the crown prince’s outlook.

enter image description hereKhalid al-Falih

Policy Shift: A Difference In Degree, Not Kind

That outlook, to be sure, does not at first glance strikingly differ from that of Ali Naimi. As we wrote earlier this week, the market share protection strategy that has moored Saudi’s strategy since the downturn began in 2014 will continue to be pursued. The difference now is against whom will it be primarily pursued.

We do not believe it coincidental that Bin Salman’s expanding authority over defense, the economy, and the oil sector, is occurring at the same time as the Saudi-Iran regional rivalry becomes more intense.

enter image description hereSaudi King Salman Bin Abdulaziz

Indeed, the next act in the proxy war between these two regional rivals began in January when Iran emerged from the oil market penalty box.

The decibel level of the Saudi-Iran oil proxy war has been rising since Iran’s return to the oil market in January. The recent proxy wars in Yemen and Syria reflect a deeper geopolitically and theologically-based antagonism between Sunni Saudi and Shia Iran. The “oil proxy war” should be understood in this geopolitical/theological context (while not dismissing the economic context, of course).

New Oil Minister & Aramco CEO Articulate Priorities

Since the start of 2016, Iran’s oil production has reached 3.5 M/bpd, up 700,000 barrels from a year ago. It has emphatically reiterated that it will not consider freezing production until that rate hits 4 M/bpd. Iran also recently slashed what it charges for oil for June sales compared to what Saudi charges, thus battling for Saudi’s customers.

Meanwhile, Saudi Aramco CEO Amin Nasser told reporters earlier this week that the country’s maximum capacity is 12.5 M/bpd, and it continues to produce ~10.4 M/bpd per month, near record highs.

enter image description hereAmin al-Nasser

And on Sunday, the new oil minister al-Falih said Saudi would maintain its oil policies- specifically, the market share protection strategy that has steered OPEC’s decision making since this downturn began in mid-2014.

In an emailed statement to Reuters, the new oil minister said the following:

Saudi Arabia will maintain its stable petroleum policies. We remain committed to maintaining our role in international energy markets and strengthening our position as the world’s most reliable supplier of energy.

We are committed to meeting existing and additional hydrocarbons demand from our expanding global customer base, backed by our current maximum sustainable capacity.

Thus, with the return of Iran the global oil market earlier this year, record-high oil production in Russia, and declining non-OPEC production (IEA estimates by 700,000 bpd this year), Saudi’s market share strategy has gradually been re-calibrated to take on its geopolitical rivals- and the crown prince is the chief architect of this recalibration.

From January To Today

We wrote the following on January 19 shortly after Western sanctions were lifted against the Islamic Republic:

In an unmistakable reference to Saudi Arabia, Iranian President Hassan Rouhani said the countries that “plotted” to bring down oil prices in order to torpedo the July nuclear deal “failed in their attempt.” Only a day after sanctions were officially rescinded, Rouhani explicitly criticized Saudi Arabia and other regional rivals that reacted unfavorably to the implementation of the nuclear deal.

Saudi Arabian foreign minister Adel al-Jubeir said in response to the lifting of sanctions that supply and demand were governing Saudi’s oil strategy, not an attempt to hurt Iran. “People should go back to Adam Smith and basic economics. It’s about supply and demand…We let the market determine where the equilibrium should be. What we’re seeing now is the market price,” he told CNN in January.

We said at the time that Iran’s return was not good news for Saudi, as the former has explicitly pledged it will seek to make up for lost time. And Saudi’s dominance of OPEC is not good news for Iran.

Iran’s President: Saudi Market Share Strategy Directed Against Iran

“We entered the negotiations with a powerful team. In the meantime, there were those that did not want to see a successful Iran at the end of the talks and resorted to the plot of reducing oil prices. However, they failed in their attempt,” Iran’s Shana news agency reported President Hassan Rouhani as saying in January.

According to his logic, then, Saudi’s decision to steer OPEC according to a market share defense strategy, specifically against Iran, is the real reason why prices are low. OPEC’s decisions over the past nearly two years were not principally directed at US shale producers, but against Iran, according to this view.

enter image description hereIranian president Hassan Rohani

The way Rouhani sees it, the proxy wars in which the Islamic Republic is engaged with Saudi throughout the region (most notably Yemen and Syria) are a reflection of a deeper geopolitically and theologically-based antagonism between Sunni Saudi and Shia Iran. Iran’s return to the global oil market is the latest act in this war. One of the unsaid reasons why many analysts believe oversupply will persist this year is because Saudi and Iran despise each other.

Tense Diplomacy

Recall that on January 4, Saudi cut diplomatic ties with Iran after the latter’s violent response to Saudi’s execution of a prominent Shiite cleric. Saudi said at the time that Iran had “revealed its true face represented in support for terrorism.” In a historical aberration, fears of a supply disruption did not erupt as a result of this geopolitical eruption. Rather, oil prices continued their free-fall, as traders recognized that Saudi and Iran’s oil proxy war had heated up on Iran’s return. “Who can outproduce whom?” was the conflict traders were factoring in then, much more so than fears of a supply disruption resulting from the restive geopolitical situation in the region. With Bin Salman steering the defense ministry, and his ally al-Falih in oil, the “Who can outproduce whom?” narrative could come again to the fore.

enter image description hereIran’s oil minister Bijan Zanganeh

Did Saudi want the P5+1 deal to be successful? Of course not. Rouhani has a point (if you can see through the conspiracy theory to the geopolitical reality). Saudi Arabia feels increasingly isolated (because it is) as the US and Western powers facilitated Iran’s return to the oil market. Iran wants its “crude” revenge- to make up for lost time, to reemerge as a major OPEC producer, and thereby to threaten Saudi’s dominance of the group.

By Jeff Reed on Oilpro.com

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