Aiming at Iran, Saudi Arabia Mixes Oil Policy With Politics
Comment of the Day

April 18 2016

Commentary by David Fuller

Aiming at Iran, Saudi Arabia Mixes Oil Policy With Politics

Here is the opening of this topical article from Bloomberg:

After taking over defense and economic planning, Saudi Arabia’s Deputy Crown Prince Mohammed bin Salman has now stamped his authority over oil policy.

In so doing, the 30-year-old son of King Salman upended the Saudis’ decades-long approach of separating commercial from political considerations. Over the weekend, Saudi officials quashed an agreement among major oil producers in Doha to freeze output due to Iran’s refusal to participate, a sign the regional rivalry is infecting the market.

“Everything at Doha was about politics,” said Yasser Elguindi, an oil analyst at Medley Global Advisors, a consultant that advises large hedge funds.

The change means that everyone exposed to energy prices, from oil majors such as Exxon Mobil Corp. to traders like Vitol Group BV, will have to heed the opaque politics of the Middle East -- and the House of Saud. With Saudi Arabia and Iran weathering one of their worst diplomatic crises since the Islamic revolution in 1979 installed a Shiite theocracy in Tehran, and both countries taking opposite sides in civil wars in Syria and Yemen, the oil market should brace for a wild ride.

“The fact that Saudi Arabia seems to have blocked the deal is an indicator of how much its oil policy is being driven by the ongoing geopolitical conflict with Iran,” said Jason Bordoff, director of the Center on Global Energy Policy at Columbia University in New York and a former White House oil official.

David Fuller's view

This looks like a power play by Deputy Crown Prince Mohammed bin Salman.  Is he just reminding everyone within OPEC that he is in charge?  Does he want them to pressure Iran into line?  It is anyone’s guess and this remains a difficult situation.

The most interesting development, in my opinion, concerns today’s price action.  Overnight, following the ‘unsuccessful’ OPEC meeting, it was forecast that oil prices would follow fall sharply.  They did, early this morning, with WTI crude dropping to £37.61 before the official US close this evening at $39.77.  Prices have also edged somewhat higher after hours.  Similarly, Brent crude slipped to $40.10 this morning before closing at $42.89.  In after-hours trading Brent has been above $43. 

What is going on?  Is this just short covering?  Possibly, and if we see further gains on Tuesday which hold through the US close it will be an impressive display of strength.      

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