Now it’s up to Iran

September 28, 2016 08:25 AM

The Saudis are making huge concessions to achieve a freeze on global oil output and the world waits for Iran’s decision. The Saudis have offered to cut their own oil production and offered to allow Iran, Libya and Nigeria to increase their oil production to “sensible” levels. While it is likely that Libya and Nigeria would agree to be allowed to increase their production to recent highs, it is unclear whether Iran will go along.

You see, it is usually Saudi Arabia that dictates oil policy by being the biggest producer in the cartel. They normally get their way because they have the most capacity to raise or cut production. Now with the Saudis struggling financially, Iran seems to be relishing its new role of making or breaking an oil production cut; maybe even breaking the Saudi economy. Maybe it is a little payback by Iran because the Saudis backed sanctions on their rival. My feeling is that Iran will go along with the deal but may keep the Saudi’s and the world waiting as they relish in their little OPEC power trip.

Saudi oil minister Khalid Al-Falih also said that he sees the global oil market getting in balance. He points to declining U.S. oil stocks and strong demand. He states that the worst of the oil market downturn is behind us and he sees higher prices ahead.  The Saudi oil minister says that he will meet with the Russian oil minister Alexander Novak in October in a bilateral meeting. Novak for his part says that he is interested in a production freeze and will go along with OPEC if they can agree. It seems like the deal is all but done assuming that Iran decides to go along.

Iran should go along because they have everything to gain and nothing to lose. It is unclear that Iran can hit their higher oil production targets for a while so to agree to freeze at those levels should not be hard. Besides the price you will get for your oil will be higher when it gets to your target, if you agree to a freeze.

Oil also is getting support from the American Petroleum Institute (API) report. The API reported that U.S. oil inventories fall yet again to 752,000 barrels. That was a surprise but seems to confirm the Saudi oil minsters contention that U.S. oil supply is falling and we are seeing near record demand. Cushing, Okla., oil supply fell by 832,000 barrels. The API also reported that gasoline inventory fell by 3.7 million barrels and distillates by 832,000 barrels. If the Energy Information Administration report confirms we should rally across the board.

We are still watching Tropical weather activity in the Gulf. There are two disturbances that could impact supply. Stay tuned.    


About the Author

Phil Flynn is a senior energy analyst at The PRICE Futures Group and a Fox Business Network contributor. Phil is one of the world's leading market analysts, providing individual investors, professional traders, and institutions with up-to-the-minute investment and risk management insight into global petroleum, gasoline, and energy markets.