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Oversupply hitting oil prices, not a secret plot: Saudi Arabia

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January 21
3:49 AM 2016

Saudi Arabia, the leader of Organization of Petroleum Exporting Countries (OPEC), has reiterated that oversupply in global oil market is the prime reason for price drop and there's no secret plot to hit any rival. Saudi Arabia is firm on production level to sustain market share and make it difficult for the US to continue with high cost shale production.

Saudi Arabia has ruled out allegations that Iran has been purposefully targeted in the oil price war. Adel al-Jubeir, the Saudi foreign minister, told CNN that "people should go back to Adam Smith and basic economics. It's about supply and demand," when asked about allegations that Saudi is trying to hurt Iran with cheap oil. 

CNN Money report that the surging shale oil production in the US and OPEC's firmness on sustaining market share hammered down the oil price by 75 percent since mid-2014. Crude oil price dropped to $27.92 per barrel, a 12-year low. However, Saudi Arabia is not reducing production to support oil price, but continuing production to sustain its market share.

Despite falling oil price to sub$30 a barrel, Saudi Arabia is keen on maintaining the production level so that it can keep up with the market share. At the same time, it can make the production tough for the US, which has been increasing the shale oil production to counter the Saudi strategy. But, US shale oil production involves high cost and it's difficult to continue production at prevailing low oil prices. 

The concerns that lifting of sanction against Iran may unleash a fresh price war in global oil market, impacted Middle East financial markets in a negative way. The selling spree has wiped out £27billion market capitalization in the seven Gulf stock markets, as reported by The Telegraph

Al-Jubeir said: "We let the market determine where the equilibrium should be. What we're seeing now is the market price." Some political observers see a geopolitical motive to hurt Iran in the whole oil price war game. Saudi Arabia is also embracing free market capitalism. 

Al-Jubeir further explained that a cut in production will effectively bailout those who're allegedly responsible for the price drop. "Saudi Arabia refused to cut its production in order not support high producers, since that would have set a stage for a drop in prices and volume down the road, what we're seeing now is the market price," said Al-Jubeir as published by Business Insider

"They worry about a potential realignment of power in the Middle East if Iran were to emerge from the shadows of sanctions and reassert itself," said Bordoff, who is currently director of the Columbia Center on Global Energy Policy.

With Western sanctions going off, Iran can now reenter the global oil market. Iran is planning to produce 500,000 barrels per day and aims at increasing it to one million barrels within a year.

Jason Bordoff, a former national security and energy adviser to President Obama, recently told CNN Money that "the Saudis are in no mood to do Iran any favors right now."

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