Oil prices have fallen below the key $100 a barrel, but Saudi Arabia is not lifting its foot off the accelerator.
Riyadh is moving into July pumping above its normal output for the sixth consecutive month, according to industry officials familiar with Saudi Arabia.
The kingdom has produced around 10m barrels a day, give or take 100,000 b/d, since February as Riyadh faced extra demands of crude from countries that were blacklisting Iran ahead of the introduction of European Union and US sanctions.
Saudi Arabia is maintaining its high output level in spite of significantly lower prices in recent weeks. The cost of Brent crude has fallen from a peak of $128 a barrel in early March to a low recently of just above $88 a barrel – a $40 slide.
The kingdom does not appear worried about the drop, particularly since prices have recovered to close to $100 over the last two days, industry officials said. Oil prices are back more or less to where they were when the Opec oil cartel met in Vienna, Austria, in mid-June. Opec left its official production target unchanged at the meeting.
The high Saudi production is acting as a strong counterweight to growing geopolitical worries around Iran. After EU and US sanctions came into force on July 1, Tehran has upped its rhetoric about potential retaliation. The noise mirrors similar comments in January and February, when Iran repeatedly threatened to shut down the Strait of Hormuz, the narrow shipping lane between Iran and Oman which is vital for around a fifth of the world’s crude oil trade.
Iranian media reported on Monday that the country’s national security committee had drafted a plan signed by 100 lawmakers to “prevent passage of oil tankers carrying crude to the countries which had imposed sanctions” against Tehran. The threat was received with a degree of scepticism by Gulf-based industry officials, who questioned whether Iran would take actions that, in effect, would trigger a major conflict in the region.
The heated rhetoric seems to have caught the oil market off-guard, but if January-February serves as a precedent, traders should brace for more of the same out of Tehran.
One of the factors behind the boost in demand for Saudi crude has been the refiners’ recent scramble to secure supplies.
Industry officials say that back in January and February, many refiners were still lured by Tehran’s credit terms which gave some clients up to 180 days to pay for purchases. Thus, refiners continued buying Iranian oil regardless of the upcoming sanctions. But now they are considering the guarantee of supply their main priority, shunning Iranian oil.
The Commodities Note is a daily online commentary on the industry from the Financial Times
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