Energy Markets

Not Just Iran or Venezuela, Saudi Arabia Also Poses A Significant Risk To Oil Prices

Oil price forecasts were raised by Citigroup analysts this week due to a combination of increasing demand and potential supply losses from Iran and Venezuela. Jose Chalhoub argues that Saudi Arabia poses an equal, if not greater risk to supply losses given the security risks the country faces.


Recently Citigroup analysts raised their oil price forecasts projecting  bullish oil prices for the rest of 2018, specifically citing possible disruptions in overall productions from Iran and Venezuela. Both countries continue to face longstanding operational and financial risks while suffering the brunt of sanctions from Washington and the European Union. There is also the stark possibility that additional targeted sanctions will be implemented by the White House over Venezuela’s already frayed and declining oil output. At the same time, oil production in Iran is likely to suffer once again if the Trump administration decides to repeal the Nuclear Deal this coming May.

In this sense, both countries are (or have been) important oil players in global markets, but their respective outputs and exports have seemingly decreased, particularly in Venezuela. Hence, the prospects for both countries’ recovery looks bleak operationally speaking; at least in the short term. Specifically in the case of Venezuela, continuing decline in production, critical status of its refining and en masse emigration of its skilled workers overseas all pose a challenge to the country’s oil markets.

Aside from Iran and Venezuela, whose potential disruptions of oil supplies may be one source of risk, the real risk that can cause a significant increase in prices is Saudi Arabia. The Kingdom of Saudia Arabia is the main oil exporter and producer and the only one with the capacity to become the producer of last resort within the OPEC organization. At the same time, the country faces direct threats from the Houthi rebels in Yemen, who have already launched missile strikes over the Saudi capital of Riyadh and most recently at  Saudi flagged oil tankers. In a defining social, political and geopolitical moment for the Al Sauds with Crown Prince Mohammed Bin Salman advancing multiple reformist programs such as Vision 2030 and NEOM, Saudia Arabia is still not immune to external security threats.

With an average monthly production over 7 million barrels per day, Saudi Arabia poses the real threat to the behavior of oil prices. Oil outputs, therefore, can effectively be interrupted in any hypothetical scenario of one or many simultaneous attacks against strategic  Saudi oil facilities such as the Ghawar field or Ras Tanura port, either by Houthis or radical extremists from Al Qaeda. Moreover, with non-OPEC countries like the U.S. and Russia competing for a piece of the pie, OPEC members like Saudi Arabia are always looking to capitalize on their oil gains. The boom in U.S. shale oil production, which led to major exports to Asia, the Caribbean and Europe, is what has caused the long lasting glut, prompting the existing cap on production between OPEC and non-OPEC members. The OPEC agreement is what has driven prices to the levels seen today at $72 per barrel, supplemented by the geopolitical premiums of the instability in Syria and recent airstrikes there.

With OPEC aiming to slash oil production in many ways to counter the glut caused by U.S. shale oil production, the current oil prices tend to satisfy most OPEC members, except Venezuela and Iran. The reason for this dissatisfaction stems from the high break-even costs in these countries and the problems the oil sector faces in Venezuela. Oil prices through the rest of 2018 will continue to stay the course, but they have the propensity to be influenced by larger political risks in Saudi Arabia, Libya, Iraq, Yemen. Bahrain’s discovery of 80 billion barrels in reserves offers some positive outlook, altogether making a perfect mix for spikes in oil prices. More importantly, the oil production from Russia or the United States or other non OPEC members such as Mexico and Brazil can potentially offset any further disruptions from OPEC member states in the coming months.

In a general sense, global oil markets and prices will always depend on fundamental economic factors, i.e. supply and demand coupled with political risks. At the end of the day, the major players in oil production will continue to vie for the perfect balance to reach oil prices that satisfy their criteria.  Ultimately, oil companies, be they National Oil Companies or International Oil Companies, will also play a critical role in pushing and pulling the oil prices in either direction. Their tactics from time to time cause oil price spikes, more so in times of global economic distress. Most of this maneuvering affects oil producers OPEC member countries more directly. But the risks to oil production posed by Saudi Arabia’s political positions cannot be overlooked, especially while OPEC, Russia and the United States all flex their muscles in the oil and gas industry with the ultimate goal of controlling and reaping the benefits of the market.

Jose L. Chalhoub Naffah is an oil and political risk analyst based in Venezuela. He has over 13 years of experience in the Venezuelan oil and gas industry and now works as a freelance consultant and advisor on oil and political risks for businesses and investors. Mr. Chalhoub is a political scientist and with a Masters in International Politics and Oil Trading. He is also proficient in Russian, English, French and Arabic, along with Spanish as his mother tongue.

Please note that opinions expressed in this article are solely those of our contributors, not of Political Insights, which takes no institutional positions.


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