Doha: Saudis Call Iran's Bluff

The gun smoke at the Doha oil freeze meeting between Opec and non-Opec producers has somewhat dissipated. After the initial media frenzy and the overreaction of the financial markets, some clarity has returned to the oil markets. 

Most analysis, just after the failure of the meeting, expected oil prices to plunge. Financials even indicated again that a price plunge to around $30 or even lower would be possible the coming weeks. Emotions again took over, while the real underlying reasons behind the lack of results – the Saudi–Iranian confrontation and the growing aggressive international position of Saudi’s Deputy Crown Prince Mohamed Bin Salman, which were not new – should have been taken into account before Doha. 

In reality, the mishap in Doha meant that on that day nothing happened in the market as fundamentals remained as before.

This week, international oil prices recovered from the initial price plunge on April 18, and still show an upward tendency. At the same time, the International Energy Agency and others have published statements indicating that the demand-supply situation will improve over the next months, leading towards a stable situation where crude prices will likely rise. 

Some conservative assessments said this would happen next year, but fundamentals on the ground are showing that oil production in the US is down and Opec’s production is stable. Investments globally in upstream are also still at historically low levels, supported by a dramatic rig data report in the USA.

The real issue popping up after Doha is the need to asses some other factors that have the potential to destabilise the oil and gas markets. The growing confrontation between the Saudi-led Sunni coalition and Iran’s Shi’a Block (Iran-Iraq-Syria) is a worrying sign of conflicts to come in the next few months. A regional conflict is still brewing in which Iran and Saudi Arabia are heading towards a military confrontation. The ongoing proxy war that is being fought in Iraq, Syria, Yemen and somehow even Libya, could move into a new phase, in which Arab military forces clash directly with Iranian supported armies. 

Bin Salman Comes out on Top

At the same time, Saudi Prince Mohamed Bin Salman showed before and during the Doha meeting that he has become the main force inside the House of Saud. He decides the Kingdom's direction for the coming years. His statement that there would be no deal possible without the participation and compliance of Iran meant that no positive result was to be expected.

Bin Salman also indicated two other things when he addressed the press on Doha. First, the Deputy Crown Prince (and defence minister) has unofficially outgunned the oil minister. He effectively has removed all time Saudi oil minister Ali Al Naimi from his power position within Opec.

This move still needs to be assessed, but after years of rumours that Al Naimi was about to retire, that eventuality now seems likely. Interestingly, no real successor has been groomed openly. Some indications are that Saudi Aramco’s Khalid Al Falih could be readied to take over soon. Still, a new oil minister will always be standing in the shadow of Prince Mohamed Bin Salman. 

Second, the sharper focus on the Iranian position during the Doha talks also shows Bin Salman’s Opec strategy. Saudi Arabia is still committed to its market share strategy whereby a production freeze is less important than forcing competitors out of the market for good.

Calling Iran's Bluff

In this, Bin Salman’s reaction to the Iranian 'No' was to be expected. The Saudis are calling Iran's bluff. As insiders have indicated, Saudi Arabia is only partly happy with the results of its market-share strategy. The negative effects on US shale, non-Opec production and Iran, have been below expectations.

At present, the impact is already visible and if more operators need to file for liquidation, the market – also known as new investors – will take longer to return in full force to the oil and gas sectors.  When Iran, after being confronted by heavy Opec pressure to return into the fold, still refused to comply, threatening to increase its oil production by another 1-1.5 mn barrels/day, the Kingdom (or, Bin Salman) saw no other solution than to call Tehran’s bluff.  

Iran is at present not able to increase its production as fast as the market believes. Legal, political and financial issues still are constraining full international investments and the operations of western IOCs in the country. 

Bin Salman’s threat that the Kingdom could bring even more oil to market, by raising output by 1mn b/d, needs to be seen as an indication that Riyadh wants to quell any Iranian power brokerage.

Saudi strategic considerations have been implemented by Bin Salman without the full support of the other Opec members. The current rift has widened between those Arab (GCC) Opec members who fully support Riyadh, and the more price-focused Opec members: Iran, Venezuela and Ecuador.

Analysts have assessed this as a weakening of Opec, or even a step towards the end of the oil cartel. This is currently not the case. The Saudi strategy is already showing positive results. If they can hold on for another couple of months, Opec market share could even increase substantially, accentuating the leading position of Saudi Arabia/Bin Salman. The prince has very well understood the anti-Iranian feelings of the other Arab Opec members and they have almost linked their own future to the Saudi strategy. 

Doha: a watershed

The Doha meeting will most probably be written into the history books. In which way is still to be decided. Based on the current market situation and price developments the last day, Bin Salman’s instigated Saudi market share strategy will be mentioned. Most probably, it will also be stated that the historic religious conflict between Saudi Arabia’s Wahhabism and Sunni leadership and Shi’a led Iran has entered a new era.

Bin Salman will never retract any of his high flying projects, as he wants to secure the future of the House of Saud by any means.  An all-out market share war between Saudi Arabia and Iran is no empty threat if it comes out of the prince’s mouth. However, the most likely outcome of this will be not positive. Iran’s economic situation is still dire, unemployment high and the power position of the Shi’a conservatives still high.

An economic crisis could mean the destabilization of the current more ‘liberal Iranian government’ in Tehran.  Saudi’s government budgets have already been hit hard, but the financial position of the Kingdom is still much better than Iran's as it holds over $1 trillion in international assets in the US and EU. And strategically a strong Saudi position is more important for the West than is the possible re-emergence of Iran. 

Bin Salman knows this; and also that his other projects – the Aramco public offering, the $2 trillion sovereign wealth fund – will only be a real success if he has access to western financial markets. If needed however, Bin Salman could also decide to use his financial strings in the West to force a deal with Iran.

Dr Cyril Widdershoven is a Middle East specialist and security advisor and an oil and gas analyst based in The Netherlands