The energy markets have kicked off the new week on a sour note, with oil prices recording significant declines in early trading on Monday just days after Saudi and Iran agreed to restore diplomatic ties in a deal brokered by China, ending a seven-year rift. While oil prices plunged early on Monday, this latest selloff is more about the fear of contagion over a dramatic Silicon Valley bank failure that snowballed over the weekend, than it is about Iran and Saudi Arabia restoring diplomatic ties.
Nonetheless, analysts have predicted that mending ties between the two countries could soften the geopolitical premium that has periodically hit the energy markets due to tensions between the two countries, which back opposing sides in the war in Yemen. The U.S. National Security Council spokesman John Kirby has praised the move saying, “To the degree that this arrangement can lead to an end to the war in Yemen, to the degree that it can help prevent Saudi Arabia from having to defend itself against attacks, to the degree that could deescalate tensions - all that’s to the good side of the ledger.”
Tensions between Saudi Arabia and Iran reached fever pitch in 2019 after an assault claimed by Iran-backed Yemeni fighters on Saudi Arabia’s Abqaiq facility temporarily knocked out half the production capacity. Last year, Saudi Arabia sounded the alarm for an imminent Iranian attack, eliciting a swift response by the United States.
Related: Bank Collapse Contagion Fears Spread To Oil Prices
The Saudi Arabia-Iran deal is the latest in a series of geopolitical realignments that have lately been going on in the Middle East. For more than a year, Turkey and Saudi Arabia have been quietly negotiating normalizing relations that were severely damaged following the 2018 murder of journalist Jamal Khashoggi in Istanbul; Qatar has healed a five-year-old rift with its Persian Gulf neighbors while Israel is deepening its Arab ties at a time when its conflict with the Palestinians heats up.
Meanwhile, Tehran has issued pardons for more than 22,000 people that were arrested during protests that rocked the country following the death of Mahsa Amini. The unrest erupted in several Kurdish cities after the 22-year-old Iranian-Kurd died on September 16, just three days after she was arrested by Iran’s “morality police” for allegedly breaching the country’s strict dress code for women.
Iranian Oil Exports Reach Record Levels
Last year, Iran’s oil exports hit their highest level ever since the U.S. imposed fresh sanctions on it in 2018. According to Iran’s Oil Minister Javad Owji, Iran exported 83 million more barrels of oil since the start of the Iranian year on March 21, 2022 than during the preceding 12-month period and 190 million more barrels than each of the two preceding years. The country’s gas exports were also up by 15% Y/Y.
While increasing Iranian oil exports are likely to cause jitters in delicately-balanced oil markets, it’s unlikely that the trend is going to be sustainable without the country agreeing to a new nuclear deal and the U.S. lifting sanctions.
Currently, prospects of reviving the Iran nuclear deal have swung dramatically, from near certain in March 2022 to almost nil currently, with talks hitting yet another stalemate in September. Meanwhile, exchanges on a compromise text are still falling short of satisfying all the involved parties.
A successful nuclear deal could change the oil markets, with former Iranian oil minister Bijan Namdar Zanganeh saying that his biggest dream has always been to increase Iran’s oil output to six million barrels per day; earn $2 trillion through oil exports over the next two decades and use the income to invest in the country’s development.
However, the overall balance might not change much even in the event of sanctions being lifted, with tanker tracker sources--which rely on satellite imagery to follow global oil shipments--suggesting that Iran’s oil exports to countries like China are already fairly high, meaning we may not see a huge increase even if the country rejoins the global markets.
Although the U.S. and its allies have been scrambling to put together a fresh nuclear deal with Iran following Trump’s unilateral withdrawal from the JCPOA in May 2018, not everybody thinks it’s a good idea. To wit, former U.S. vice president Mike Pence has warned that such efforts would pave a path "in gold" to a nuclear weapon, with his comments coming after he spoke to Iranian anti-regime activists in Washington, D.C. on Saturday.
By Alex Kimani for Oilprice.com
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The impact of the Saudi-Iranian diplomatic agreement will be overwhelmingly geopolitical with the impact on oil is only limited to strengthening OPEC+ and making it easier for it to take tougher decisions when both Saudi Arabia and Iran are reading from the same hymn book.
In geopolitical terms, the diplomatic deal could be expected to achieve the following:
1- It will establish a rapprochement between Saudi Arabia and Iran thus improving their mutual security and cooperation.
2- It will put an end to the United States’ playing both countries against each other and create an environment of trust between the two regional powers of the Gulf.
3- It will reduce tension between Iran on the one hand and other Gulf Cooperation Council (GCC) countries on the other thus improving security in the Gulf region.
4- It could pave the way for an end to the war in Yemen probably ending the Yemeni rebels, the Houthis, targeting Saudi oil installations.
5- It could also bring the civil war in Syria to its final conclusion with both Iran and Saudi Arabia exerting pressure on Turkey to reach some accommodation with Bashar Al-Assad.
It is of particular geopolitical significance, however, that the agreement was reached in Beijing with assistance from China thus signalling its rising global influence particularly in the Gulf region and also indicating a further distancing of Saudi Arabia from the United States.
The real winners are obviously Saudi Arabia and Iran and by extension the China-Russia strategic alliance and the real losers and by a large margin are both the United States and Israel.
And whilst the US National Security Council spokesman John Kirby tried to sound conciliatory with his comments on the agreement, he and the Biden administration are bitterly angry that China managed to pull the rug from under the feet of the United States so spectacularly and in a region which is supposed to be the reserve of the US.
Another geopolitical advantage for China is that Saudi Arabia has no alternative now but to reward China sooner than later by accepting the petro-yuan for payment for its crude oil exports to China. This will be another huge blow to the US and the petrodollar.
Dr Mamdouh G Salameh
International Oil Economist
Global Energy Expert