This last week, there was immediate wailing from the analysts as soon as the announcement went out that the Saudis and the Russians were discussing an increase of up to 1 million barrels a day in their production agreement.
Many believe that the Saudis and therefore OPEC are giving up on the production deal that has brought oil from the depths of $30 oil to trade above $70 a barrel in the benchmark Brent. To them, any relaxation in the unprecedented collective between OPEC and the Russians indicates that the deal is ‘shattered’. Now, they believe that oil could be headed back to the depths it came from and are watching for OPEC to revert to its old and well-known habits of unenforceable quotas and unlimited oil production.
I say, not so fast.
Let’s look at the prior indicators for this latest drop in oil prices. We knew there were indications that the Saudis had promised Trump and the U.S. that it would take care of any shortfalls caused by the abandonment of the Iranian nuclear deal and the return of Iranian sanctions.
We also knew that the Russians were eager to be a part of any slippage in production guidelines as they have no loyalty to OPEC or the global supply chain, and are without a doubt the weakest (and most surprising link) in the production deal that has held together for nearly 18 months now.
But let’s do some simple math: Iranian sanctions are likely to target as much as 1.2m barrels a day from Iran, which…