Middle East: Geopolitics and Oil prices

Far beyond these daily news and narrative centered upon the trajectory of oil prices there is a field; where the short-term worries pales into significance and the broader, long term concerns takes hold. There are many questions. While fear of future supply in the wake of cuts in CAPEX in upstream E&P runs common along with the growth prospects of Shale in US and elsewhere in the world, what seems to be more plausible and parlous is the current and future circumstances in Middle-East that remains the world’s leading oil producing region since 20thcentury.It seems that the region is a cauldron of ambitious and whimsical potentates and leaders and it is on the whims of these that supply of one of the most strategic commodity depends.

What we are witnessing now is not new. There have been even more serious incidences: The 1967 war, The Yom-Kippur war,1973’s oil embargo, 1979 Iranian Revolution, Iraq-Iran war in 1980’s, this and many more. The region rarely enjoys any long span of stability. However, Middle-East of today is utterly different from Middle-east of the past century in many ways. We have a young potentate, Muhammad Bin Salman, in Saudi Arabia who is ready to help his country to step into future. We have a devastated Syria. Iran is the same, ambitious but checked. While the internal crevices have only widened with gulf countries cutting diplomatic ties with Qatar. What is more relevant for oil is that US is, anew, ready to join the ranks of world’s top oil producers namely Saudi Arabia and Russia. It might do so next year.

Middle-East, in any case, is not going to lose its significance. Firstly, U.S. no matter how much it grows cannot quench world’s oil thirst alone. Secondly, OPEC, even a little shaky, still wields the power to if not manipulate but effect global oil dynamics. Thirdly, the reduction in Capital Expenditure in Exploration and Production budgets, reaching trillion dollars is a cause of future concern. Some say, as mentioned in the starting, seeds for another supply crunch are already being sowed.

There are other reasons that oil markets will remain interesting in the near future. Kingdom of Saudi Arabia is becoming a cynosure for the investors of the world. MbS is determined to change the structure and system of Kingdom’s political and economic machinery. His ambitions might keep the Middle-East in a continuous commotion. There is war in and on Yemen, confrontation with Iran. KSA itself is planning to build 60 Nuclear Reactors. Will Iran keep a mum? Questions abound.

What about Kurds if they rise again? Another thing to consider is that all these countries are also party to the very pact that has been preventing oil prices to fall: Vienna agreement. What about its future? Will it become a victim of political maneuverings? If yes…what about the oil prices and what about the Saudi Vision 2030? Also, where does Russia goes then? Russia and KSA are trying to form a long term friendship/alliance to be enshrined in some form of institution. Will Russia and KSA be able to steer oil prices away from problems? If oil prices sink the Saudi Vision 2030 and NPT sinks with it too. MbS fails. The whole experiment fails. Can KSA let that happen? I think no. Last but not the least, the impending, date for Iran deal, May 12th, when Mr. Trump will decide about whether to re-impose sanctions or make a new deal. Enough excitement.

We can expect a very volatile and interesting oil markets in the near future.

Osama Rizvi
Osama Rizvi
Independent Economic Analyst, Writer and Editor. Contributes columns to different newspapers. He is a columnist for Oilprice.com, where he analyzes Crude Oil and markets. Also a sub-editor of an online business magazine and a Guest Editor in Modern Diplomacy. His interests range from Economic history to Classical literature.