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How New Saudi-Iran Relations Could Shape the Oil Market

By Ellen R. Wald, Ph.DCommoditiesJun 15, 2023 04:14AM ET
www.investing.com/analysis/how-new-saudiiran-relations-could-shape-the-oil-market-200639052
How New Saudi-Iran Relations Could Shape the Oil Market
By Ellen R. Wald, Ph.D   |  Jun 15, 2023 04:14AM ET
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  • Tehran's embassy opening in Riyadh is unlikely to impact Saudi Arabia, OPEC, or oil policies.
  • Still, rapprochement between the two countries could facilitate U.S. negotiations, potentially affecting Iranian oil sanctions.
  • Increased Iranian oil production under sanctions challenges the traditional incentive for nuclear negotiations.

Tehran recently opened an embassy in Riyadh, Saudi Arabia. Many market watchers are wondering if this is meaningful for the oil prices. The short answer is no… but maybe a little yes.

First, this will not impact how Saudi Arabia or OPEC deals with Iran or the oil market. There is no indication that the Saudi-Iran rift interfered with oil policy.

In fact, OPEC, which is in many ways dominated by Saudi Arabia, has consistently given Iran exemptions from production quotas in recent years despite the apparent animosity between Riyadh and Tehran. Therefore, there is no indication that better relations are going to change anything between these countries in the oil world or have market implications.

Where this may have some relevance in the oil market is that a rapprochement between Saudi Arabia and Iran might make it easier for Washington DC to renew negotiations with Iran and thus weaken or end the current sanctions on Iranian oil.

If DC does halt or minimize its sanctions on Iranian oil, look for at least a short-term drop in oil prices as the market would expect more open trading of Iranian oil at market prices that are not discounted. However, traders should not anticipate that improved U.S.—Iran relations will result in an increase in Iranian oil production. According to the latest survey by S&P Platts, Iran produced 2.66 million bpd in May 2023.

This reflects a small increase from Iran’s average production rate of 2.4 million bpd in 2021. At the beginning of May, Iran claimed its production had hit 3 million bpd, but independent sources, like Platts, could not confirm this.

Even if Iran is not producing quite at the 3 million bpd level, its production rates have risen despite the strict oil sanctions the United States imposed on Iran. If Iran can increase production and exports while under sanctions, then the incentive to negotiate with the United States over its nuclear program could come under threat.

There are signs that the U.S. and Iran might be considering re-opening negotiations with each other, as according to recent reports, representatives from both countries traveled to Oman for indirect talks with each other through Omani intermediaries.

The discussions concerned the release of American prisoners held by Tehran in exchange for Iranian oil and gas revenue frozen in overseas accounts.

Even though talks are very far from any agreement that would end sanctions, given how well-developed Iran’s illicit oil trade has become, the incentive to give up nuclear ambitions in order to end the sanctions is not as great a motivator as it used to be. Oil traders should be aware that talks and negotiations between the U.S. and Iran are not necessarily a bearish signal for the market.

***

Disclosure: The author doesn’t own any of the instruments mentioned in this report.

How New Saudi-Iran Relations Could Shape the Oil Market
 

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How New Saudi-Iran Relations Could Shape the Oil Market

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Comments (3)
Louie Murad
Louie Murad Jun 19, 2023 9:38AM ET
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Sanctions on Iran will continue as long as Iran is the enemy of Israel. Given Iran resent breakthrough in ultrasonic missiles and increased uranium enrichment will not help either. These negotiations with Iran are only to halt Iran's enrichment which spiraled after Trump left the agreement. Iran's relation with Saudi is insignificant on oil prices since Saudi didn't put the sanctions and have no power to lift.
Mariano Moro
Mariano Moro Jun 15, 2023 7:25AM ET
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so US is consuming more oil than can produce, it needs more and will start importing from Iran again by removing sanctions. bottom line. This way can refill the SPR. am I too far from reality?
patricio Silva
patricio Silva Jun 15, 2023 7:25AM ET
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oil at 40 $ !
Robert Cutler
Robert Cutler Jun 15, 2023 7:25AM ET
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Crude oil $PPB Is seeking Putin's age
Grant Edwards
Grant Edwards Jun 15, 2023 3:36AM ET
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Terrific reporting, as usual. Thx.
 
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