Lower Oil Prices Predicted Amid Gulf Tensions

A growing diplomatic rift between OPEC member states Iran and Saudi Arabia has led to speculation that oil prices in 2016, already predicted as a continuation of 2015’s declining price trend, will drop even more than previously expected. The diplomatic crisis between the two nations, combined with the impending lifting of international economic sanctions from Iran, could worsen the global oil glut.

The root cause of the divide between the member states is the recent execution of prominent Shiite cleric Nimr al-Nimr on January 2nd by Saudi Arabia. Al-Nimr’s execution caused Iran to sever its diplomatic ties with Saudi Arabia, even though both states remain members in good standing of OPEC. This was followed by several nations allied to Saudi Arabia, including Sudan, Bahrain and Kuwait, also severing their relations with the predominantly Shiite state of Iran.

This divide, however, has been seen as yet another impediment to Saudi Arabia’s attempts to set a production cap on OPEC in order to stabilize global oil prices after having glutted the market for much of the past year. A resolution to set such a cap was rejected by Iran during an OPEC conference late in 2015. Because of its 2015 adoption of an agreement to dismantle its nuclear program, Iran will soon be free of the international sanctions that have restricted its export markets for the past several years. When this occurs, the Middle Eastern country will have the ability to increase global oil production by as much as half a million barrels per day, according to some estimates.

As to the potential effects on the price of oil that this diplomatic crisis may have if it is not resolved before Iran uses its own production to further glut the oil market, some analysts have suggested that per barrel prices could break below the $20 support price. John Kilduff, founding partner of Again Capital, said in a recent interview that he believed oil prices in 2016 could reach a low of $18 per barrel, with a potential high of $48. This prediction exceeds even the most pessimistic views regarding the value of a barrel of oil in the coming year that had been expressed prior to the onset of the crisis between Iran and Saudi Arabia. One earlier estimate, given by Russian Finance Minister Anton Siluanov, had suggested a low of $30 per barrel. While it is not yet clear whether or not Mr. Kilduff’s predictions will prove accurate, current projections suggest that 2016 will be another difficult year for oil.