The Saudi-Iran oil clash
In the Saudi-Iran oil clash, Riyadh gains an edge
Saudi Arabia is poised to boost its share of OPEC oil production in the coming months, as Iran's rapid recovery runs out of steam and the kingdom raises output as summer temperatures soar.
OPEC's biggest exporter has seen its share of the group's production chipped away despite its landmark decision in November 2014 to no longer support crude prices by holding back supply. The strategic shift was driven by a desire to protect its own market share, but that's been restrained by rising production from Iraq, Indonesia's return to OPEC and the easing of sanctions on Iran.
Outsiders won't be too fussed about Riyadh's share of OPEC output, but within the kingdom and the group this matters. Saudi Arabia wants to stay dominant in its biggest export markets, plus it desperately wants to avoid losing ground to arch-rival Iran.
Saudi Share Saudi Arabia's share of OPEC output has been cut by rising Iraqi and Iranian supply Source: Bloomberg Excludes Indonesia throughout
In April, Saudi Arabia's share of OPEC production (excluding recently returned Indonesia) was no higher than before the policy shift. That may be about to change.
The circumstances that have eaten into its market share since last summer are changing, while the kingdom holds almost all the world's readily available spare production capacity, leaving it the only country that can raise output quickly.
Iraq, whose daily output has risen by 1 million barrels since November 2014, will struggle to maintain growth. The collapse in oil prices and a costly war against the Islamic State have left the government unable to meet its share of the cost of developing fields in Iraq's south. It has asked partner companies to cut spending and output is now 140,000 barrels a day lower than January's peak.
More recently, it's been Iran nibbling away at the Saudi market. Since the easing of sanctions, Iran has surprised analysts with the speed of its recovery. Observed crude exports, monitored by Bloomberg tanker tracking, jumped from 1.3 million barrels a day in January to more than 2 million barrels in April and May.
Yet, as Bloomberg News pointed out last week, the spectacular rise may have come to an end already . Further growth will depend on foreign investment that's far from certain. Bloomberg tanker tracking suggests the situation could be even more serious. Observed crude exports in the first half of June slumped to just 1.37 million barrels a day.
This could just be a matter of scheduling tankers, but Iran will need a very strong upturn in the rest of June to match the average sales of the past two months.
Of greater concern, the shipment slump could show the surge has been driven, at least in part, by sales of crude from storage tanks. If that's the case, recent export levels will prove unsustainable. Iran remains an opaque place and official sources assert that May's daily output reached 3.8 million barrels. The IEA pegged May production at 3.64 million barrels a day, while Bloomberg's survey put it at 3.53 million.
If Iranian exports do keep faltering, don't be surprised if those of its rival across the Persian Gulf head in the opposite direction. Even as Riyadh eyes a post-oil future through its "Vision 2030" plan to diversify the economy, expect it to seize advantage of any slowing rival. The game is still about grabbing long-term markets for its own crude.
This column does not necessarily reflect the opinion of Bloomberg LP and its owners.