Last time the Saudis opened the oil spigots the stock market crashed and Soviet Union collapsed.
If there’s a certain retro feeling in the air, it’s not just because everyone’s talking about a Donald Trump presidential run and a song called “Me Myself & I” is in the charts. Oil markets are also starting to have a distinctly 1986 feel to them.
The collapse of the weekend’s oil talks in Doha heralds a phase where open spigots will drive prices lower once again. Brent crude fell as much as 7 per cent when it opened after the meeting broke up in disarray. Saudi Arabia and other Gulf producers refused to cut production unless they could get a matching agreement from an Iran that hadn’t even bothered to attend the talks.
Brent’s decline post-meeting 7%
Iran has very little incentive to agree to such demands. As a relatively new entrant, Tehran will take whatever prices it can get. It may even choose to undercut the existing players where it spies an opportunity: As Bloomberg’s Sharon Cho and Serene Cheong noted earlier this month, Iran has been pricing its Forozan Blend crude below that of Saudi Aramco’s Arab Medium for three months running now, the first time that’s happened since 2008:
Citi estimates that Iran will add an extra 1 million barrels a day to global markets over the course of this year, exacerbating a glut that’s already caused the biggest oil-price collapse since John D. Rockefeller was barely out of short pants.
Back in 1986, Saudi was focused on the threat of the Soviet Union’s booming, higher-cost production, and boosted output by 1.6 million barrels a day to flood the market and leave itself as the strongest player standing. The 45 per cent increase in production sent prices from north of US$30 a barrel to south of US$15, with some heavier, sour grades changing hands for well below US$10.
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