Oil-related Developments - December 2018

From April onwards, a month before the announcement of sanctions on Iran, President Trump began to criticise OPEC for maintaining high prices and to insist that it increase production; this was clearly aimed at ensuring that moderate prices prevailed despite the withdrawal of Iranian oil from world markets.

In response, Saudi Arabia led OPEC members and their non-OPEC partners in increasing production to record levels. Pressure on Saudi Arabia increased following the Khashoggi murder on 2 October when Trump made it clear that the Saudi crown prince realised the importance of Trump’s support which meant the kingdom maintaining high production even if this meant a significant fall in prices.

At November-end, prices fell below $ 60, the lowest level in a year. This was a 30% fall over two months, with Brent going from $ 86 to $ 58, and WTI down 7% to $ 50. This precipitate fall in prices compelled OPEC to take corrective action despite pressure from President Trump to maintain output at current levels for the benefit of American consumers.

OPEC and its oil-producing allies agreed on 7 December to cut production levels by 1.2 million barrels a day. Saudi Arabia will slash production by about 900,000 barrels a day compared with November levels, with Russia cutting 230,000 barrels per day out of the 400,000 barrels agreed to among the non-OPEC producers. Iran, Venezuela and Nigeria have been exempted from cuts.

Iran is already feeling the impact of US sanctions: in November, Iran’s oil output fell to below 3 million barrels per day (bpd) despite eight national waivers to sanctions granted by the US to China, India, Japan, South Korea, Taiwan, Turkey, Greece, and Italy.

Iran’s exports are expected to be around 1.1 million to 1.3 million bpd for the duration of the US sanctions. Its budget for the next fiscal year, beginning March 21, assumes exports of 1.5 million bpd. Hence, Iran could attempt to maximise barter deals to bridge the gap.

According to Saudi commentator, Wael Mahdi “everyone in Vienna knew that Russia played a big role in bridging the gaps in views among OPEC countries, despite not being a member of the organization, instead belonging to the alliance known as OPEC+.”

The deal had an immediate impact on oil markets. The prices of Brent crude and West Texas intermediate crude rose sharply after the news emerged: Brent crude was up more than 5 percent, to $63.16 per barrel, and WTI crude was up about 4.5 percent, to $53.79.

 

December 9, 2018

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About the Author

Ambassador Talmiz Ahmed

Former Ambassador of India to Saudia Arabia, Oman and UAE, monitors developments in the West Asian region.  

Ambassador Talmiz Ahmad joined the Indian Foreign Service in 1974. Early in his career, he was posted in a number of West Asian countries such as Kuwait, Iraq and Yemen and later, between 1987 and 1990, he was Consul General in Jeddah. He also held positions in the Indian missions in New York, London and Pretoria. He served as Indian Ambassador to Saudi Arabia (2000-03; 2010-11); Oman (2003-04), and the UAE (2007-10). He was also Additional Secretary for International Cooperation in the Ministry of Petroleum and Natural Gas in 2004-06. In July 2011, the Saudi Government conferred on him the King Abdul Aziz Medal First Class for his contribution to the promotion of Indo – Saudi relations. After retirement from the Foreign Service in 2011, he worked in the corporate sector in Dubai for three years. He is now a full-time academic and holds the Ram Sathe Chair for International Studies, Symbiosis International University. He has published three books: Reform in the Arab World: External Influences and Regional Debates (2005), Children of Abraham at War: the Clash of Messianic Militarisms (2010), and The Islamist Challenge in West Asia: Doctrinal and Political Competitions after the Arab Spring (2013). He writes and lectures frequently on Political Islam, the politics and economics of West Asia and the Indian Ocean and energy security issues.