Oil markets are fundamentally risk-avid and react obsessively in times of geopolitical unrest, ignoring other factors. Historically rising prices and volatility recalibrate political equations aimed at wresting economic advantage. In this light, we can see the current slide in oil prices as steering a broader détente and seeking new multi-lateral alliances.
Taming inflation was the high point of Donald Trump’s campaign. However, his enthusiasm to cool oil prices distracted him from the ramifications of very low prices on the US economy and beyond.
In 2024, higher prices encouraged American Permian Basin producers to maintain a high active rig count despite the average breakeven of $62 a barrel in the Midland Basin and around $64 in the Delaware Basin—the most prolific regions. Mind that no single price can be determined as profitable across the US shale spectrum, as a host of variables such as operating costs, ease of extraction, and drilling and material costs determine profitability across companies and terrains. Nevertheless, the present fall in West Texas Intermediate prices will compel a reduction of production targets, decelerating last year’s shale growth.
The past reveals what may transpire in the future. As oil prices fell in 1982, Saudi Arabia resorted to production cuts. Other OPEC countries began cheating and discounted their oil to maintain shares as the market witnessed a glut. By August 1985, Saudi Arabia’s production plummeted to 25 percent of its 1981 output of 10 million barrels per day, in a strategic bid to maintain prices in a sluggish world market. The crash of 1985-86, when prices dipped more than 60 percent, underlined the failed efforts.
Learning from the past, the Saudis no longer wish to forgo their share. Moreover, the recent lowering of Aramco’s dividend is evidence of pressure on its profits. In line with its earlier strategy of March 2020 and January 2024, discounts were recently offered to select customers on some products. A production ramp-up may well materialise to leverage scales.
Aiming at a ‘more productive’ US-Saudi relations, the nuclear deal slated to be settled between the two countries is suggestive of an unspoken protocol, hinting at their continued co-operation to ‘regulate’ oil supply for mutual advantage and market stability. History is witness to many such alliances. The 1979 Iranian revolution significantly disrupted oil supplies to the US, leading to long lines at gas stations. Saudi Arabia consequently raised its output, mitigating America’s woes and stabilising prices.
With an academic background in energy studies, Saudi energy minister Prince Abdulaziz has advised the country since 1987, before being appointed deputy oil minister in 1995. He holds his current office since 2019, besides being on the board of a few international organisations linked to petroleum studies. So, he stands well-informed on the strategic implications of oil prices.
On the other side, Chris Wright, US energy secretary and founder of Liberty Energy, the second largest hydraulic fracturing company in the US, is also privy to price sensitivity vis-a-vis the viability of US’s shale oil industry. Some of his recent comments—“I can’t predict oil prices, that’s for sure…But people always take a trend and extrapolate. The world doesn’t work that way”—resonates with the current volatility.
As these two seasoned experts meet for negotiations in Riyadh, “highlighting the need for stable oil prices”, it indicates a pragmatic outcome in order to “facilitate investments in energy infrastructure” and provide energy security for both countries.
On the other hand, surging Iranian oil exports, despite sanctions, has irked Washington for a long time. ‘Dark fleet’ tankers and transactions in the Chinese currency continue to facilitate 90 percent of Iranian exports to China. The continuing Chinese dominance in West Asia has prompted successive US governments to re-visit the issue of Iran’s nuclear programme. Earlier this month, US special envoy Steve Witkoff held talks with Iran’s foreign minister Abbas Araghchi in Oman, followed by a second round in Rome last weekend.
With strong opposition from Iran’s hardliners, it is too early to predict the outcome of the meetings. Learning from past experience, a stalemate is a distinct probability, which could induce stricter sanctions on the Islamic republic’s oil exports. The resultant short-term supply constraint could prolong production outages at China’s ‘tea pot’ refineries. A successful outcome could, on the other hand, release more Iranian oil to the ‘legitimate’ market which, with higher UAE and Kazakhstan production, may steer Washington to be stricter on Russian oil exports, thus compelling Moscow to sit at the negotiating table over the Ukraine impasse. The markets’ response may be muted, as supplies eventually balance out.
This time last year, the world was apprehensive of rising oil prices fuelling inflation. Much has changed since then. Lacklustre demand and oversupply despite OPEC’s production cuts suggest a bearish outlook. Persistent low prices could render recent transcontinental investments and joint ventures unsustainable, and affect many oil majors’ profitability.
As optimism prevails, with oil prices moving above short-term resistance level of $65, Brent could be range-bound at $67-$70for some time. But given the White House’s unpredictability, it may be early to celebrate the price recovery.
J Paul Getty, the American-born petroleum industrialist, aptly said, “Without the element of uncertainty, the bringing off of even, the greatest business triumph would be dull, routine and eminently unsatisfying.”
Ranjan Tandon | Senior markets specialist and author
(Views are personal)