Complex Made Simple

Opinion: Iranian oil on broil – the slippery slope of rising oil prices

By Pankaj  Gupta, Associate Director, SMC Comex

First things first – oil prices are clearly unstable. While on the overview, they’ve been at an all-time high, there was a significant 5% drop in oil prices in the UAE just last week. The global highs in oil prices are common knowledge; we see it every month when we stop for gas on the way to work with deeper holes seared into our pockets.

Between December 2017 and January 2018 alone petroleum prices have increased by 8.24% in the UAE itself.

In May 2018, the OPEC Reference Basket (ORB) increased by about 8.5% above the previous month, settling at $ 74.11/b. Supply has been up-up-up, and the first-world US market is making a major come-back.

There is a forecast for steadily rising prices too.

While as consumers, this does not really shock us, but in the light of supply-demand ratios the experts are well-versed with, there is more at play when it comes to pricing.

Read: Where are oil prices heading and what is controlling them?

On a heady June night, the OPEC+ panel recommended raising supply by a nominal 1 million barrels a day – theoretically. This is after a monumental effort of cutting production down to stabilize the price of oil – again, theoretically.

In practicality, not only will the increase in supply be at best 50-60% of the forecast amount, price increases will be a major conversational topic until the US Shale Revolution opens its doors to export.

This is not an impossible future step, what with Trump’s shredding of the Iran Nuclear Deal from the US’s end, in what may be a bid to oust Iran from the mainstream supplier market.

In the midst of this turmoil, Iran walked out of the OPEC panel on the eve of the production rise sanction.

Trump brings the threat of re-imposed sanctions and slap-stops on the Iranian oil exports, with the Indian and Chinese governments given a notice to stop all trades with Iran by November 2018, unless they want to lose US support.

A threat of this magnitude from a reigning superpower, especially one with a currency that only grows stronger every week, spells trouble for Iran’s oil market.

Now that’s a lot of facts about the world, does this really concern the UAE?

Well, it has been, for quite a while now.

Read: Sanctions on Iran causing more volatility for oil and global markets

You see, around the time the US Shale oil production began surfacing, the UAE and many other markets began removing energy subsidies, with prices adhering to the global pricing dynamic for fuel.

This step spelled positivity during a global economic meltdown, with a severe fall in prices for oil .

What started as a budgeting effort for the better has turned into an inflationary nightmare on a microeconomic level – when one could earlier fill up a regular sedan tank in about AED100, one has to shell out close to AED170 to keep a car running for the month.

Read: Thought gasoline was driving oil prices? Think again

Politically, the not-so-hidden ace of shale oil in the US arsenal alongside the scrapped Iran Nuclear Treaty has already led to severe unrest in the Mediterranean-Middle Eastern countries.

Financially, while prices are rallying, the backwater of oil contracts in the futures market reflects a direct hit – crude oil futures slipped, and by 11 June, ICE Brent stood at $76.46/b and NYMEX WTI at $66.10/b.

This means that, while there was a good short-term benefit of deregulated energy subsidies in the region, as the strategic oil production increase goes, despite the best efforts of the OPEC to stabilize prices, we’re looking at a market that will be in over its head should the US open its oil exports.

For now, one can count on some significant price shifts snowballing from a walkout one June night.