Iran Threatens Price War: Oil at $20 a Barrel?

OPEC is very likely to maintain its official production quota of 30 million barrels a day after Wednesday’s meeting, of which Iran currently produces about 2.8 million barrels. An increase of 1.2 million barrels would put downward pressure on prices, and Brent crude is already feeling the pressure, down about 0.5% in early morning trading on Wednesday.

The cartel is stuck between a rock and a hard place, as we noted Tuesday. Arab medium crude exported to the United States is trading at a discount of about $20 a barrel to Brent due to increased production from U.S. shale plays. Crude that was once exported to the United States is being diverted to Asia, where prices remain high. But those prices, too, eventually will fall as U.S. imports continue to shrink.

Iran is no doubt encouraged by the recent temporary agreement related to its nuclear development program. The country needs to pump and sell more oil to make up for the cash it lost during the embargo.

Saudi Arabia, the largest producer among OPEC members, is also the most likely to have to cut production if Iran makes good on its pledge to boost production to 4 million barrels a day. The Saudis are not worried, however. The country’s oil minister is quoted in the Financial Times:

You are preoccupied by Iran and that is not a good preoccupation. You know what is going to happen if the price goes to $20? You know how many countries would be out of producing, including shale oil, including Canadian sands oil, including subsalt oil. All of that will be gone.

The Saudis know prices will not fall to $20 a barrel. But $50 or $60 is not entirely out of the question, especially if Russia decides to compete on price, something that it has done at every opportunity in the past.