Geopolitical motivations are receiving increasing blame for the collapse of crude oil prices.
The escalating rivalry between Saudi Arabia and Iran is intensifying bilateral market competition, which some observers say eclipses in importance Saudi concern over expansion of supply from North America.
Always-tense relations between the countries turned fraught this month when Saudi Arabia included four Shiites, including an outspoken critic of the royal family, in the execution of 47 prisoners said to be terrorists. The execution triggered protests in Iran in which consular properties came under attack, including the embassy in Tehran.
In a Jan. 7 research note, ESAI Energy LLC said it considers the oil price and battle for market share to be “quite central” to the Saudi-Iranian rift.
The Saudi strategy, it said, is driven “only indirectly” by rising production in North America—which many other analysts see as the central Saudi concern—and more directly by defense of Asian markets.
ESAI said the increase in Iranian oil exports likely to begin once international sanctions are lifted represents “a direct and tangible threat to Saudi markets in both Europe and Asia.”
It noted Saudi Arabia has lowered the price of its crude in Europe and probably will do so in Asia.
“As this diplomatic rift evolves, the Saudis’ greatest weapon in the months ahead may be their ability to market more and cheaper crude oil than even Iran,” ESAI said.
It predicted “more crude, lower prices, and a market share battle that becomes increasingly painful for every other producer.”
The investment company Oppenheimer & Co. Inc., meanwhile, took the analysis a step further in a research note the same day.
“We have long believed that the Saudis are driving oil prices lower to inflict pain on Iran,” said author James Schumm. “Any collateral damage to US shale producers is a secondary or tertiary benefit.”
Citing recently announced budget cuts in Saudi Arabia, Schumm acknowledged that low crude prices hurt the kingdom—but not nearly as much as they damage Iran’s ability to fund sectarian conflict in the region.
“Essentially, they [the Saudis] are forcing Iran to choose between higher oil prices and the economic prosperity that comes with it and the desire to foment Shia uprisings in the Middle East,” Schumm said.