The outcome of this week’s Opec meeting in Vienna is uncertain. The sharp fall in prices to below $60 a barrel for Brent crude and around $50 for West Texas Intermediate is beginning to be painful for producers whose economies depend on oil revenues. But there is, as yet, no agreement on who should cut supply and by how much. The key unknown factor in the calculations of all those involved is the impact on the market of the newly strengthened US sanctions on Iran.
Will they succeed in cutting off revenue and forcing Tehran back to the negotiating table? The increase in prices this year to a peak in early October of $85 for Brent crude was fuelled by fear that the rhetoric of the Trump administration might be based on a real plan to cut off all Iranian oil exports. That would have reduced global trade by some 2.5m barrels a day, producing a genuine physical shortage of oil for the first time in decades. Since then, the dire predictions have been mitigated by events.
First, the US administration granted waivers on trade in oil for the next six months from Iran to a range of countries including big customers such as India, China, Japan and South Korea. That allows at least half of Iran’s current trade to continue unmolested. Second, US president Donald Trump has neatly pinned the Saudi crown prince Mohammed bin Salman into a corner. The murder of the dissident journalist Jamal Khashoggi gave the US president the opportunity to step in as defender of Prince Mohammed.
The price for his support is the increase in Saudi production over the past few weeks to more than 11m barrels a day, which has led to the sharp fall in prices and was met with a tweet of thanks from the White House. The immediate effect has been the reduction of oil prices. With any potential gaps in supply covered, there is no reason for shortages. On the contrary, the speed of the recent fall suggests that there is a surplus, and that is why Opec will be considering cuts.