SEATTLE (Oil Monster): The United Arab Emirates has fired the opening shot in what is fast becoming a fierce battle among Middle East oil producers to reclaim market share after the Iran war, a contest that threatens to weaken oil prices and further erode OPEC's authority.
Gulf producers, desperate for revenue to replenish state coffers depleted during the four-month-old conflict, are under enormous pressure to sell the millions of barrels accumulated in tankers and storage facilities during the effective closure of the Strait of Hormuz. Until this space is freed, these producers cannot restart the oil and gas operations that were crippled by the conflict.
The UAE has moved first. Its crude exports surged to a record 3.8 million bpd in June, according to Kpler data, after the strait was partially reopened following the memorandum of understanding between the U.S. and Iran on June 17. Much of that volume likely came from onshore and offshore storage as oilfield production recovers gradually.
The aggressive push follows Abu Dhabi's decision to quit the Organization of the Petroleum Exporting Countries in May after six decades of membership. It is now free to pursue a fully independent production strategy without OPEC constraints.
Saudi Arabia, OPEC's de facto leader, is also turning up the taps. Its June exports rose to their highest level since the start of the war at 4.5 million bpd, while July shipments are set to jump to 6.4 million bpd, less than 1 million bpd below pre-war levels, according to Kpler.
Iraq and Kuwait, which shut down much of their production during the conflict, have also resumed exports, each shipping around 500,000 bpd through Hormuz in June.
The rebound has been shockingly swift. Total exports via Hormuz nearly quadrupled in June from May to around 4.2 million barrels per day (bpd), according to Kpler. That rises to roughly 10.5 million bpd when including volumes shipped through ports that bypass Hormuz.
While this remains well below the pre-war average of around 17 million bpd, it still marks a dramatic recovery from the depths of the conflict.
This is certainly not the first time oil producers have engaged in a battle for market share. OPEC flooded the market in 2015 to defend its position against surging U.S. shale production. But rarely has the cartel openly displayed an internal tussle for market position.
It is clear why this is happening now. OPEC is more fractured and vulnerable than at any time in recent memory following both the UAE's departure and the Iran war, which inflicted severe economic damage on several of its core members.
Seven key OPEC and allied producers, including Russia, a group known as OPEC+, sought to project unity on Sunday by agreeing to raise output by a further 188,000 bpd from August, bringing cumulative production increases since the start of the war to almost 800,000 bpd.
Much of that supply boost remained theoretical while Hormuz was effectively closed, but those barrels can now begin flooding the market.
However, demand growth is recovering far more slowly. The International Energy Agency forecasts global oil supply will exceed demand by a whopping 5 million bpd next year.
Historically, OPEC has stepped in to prevent extreme market imbalances of this type, limiting excessive price volatility by adjusting production levels.
This time, however, Saudi Arabia may struggle to persuade fellow OPEC Gulf producers Iraq and Kuwait to curb output after months of lost revenues — especially when Riyadh was able to use alternative export routes during the crisis.
The kingdom faces an uncomfortable choice. If it allows members to maximise production, prices could tumble. Benchmark Brent futures have already fallen to around $70 a barrel, nearly $50 below the wartime peak of $118, despite continued uncertainty over the strait’s long-term security.
But if Saudi Arabia seeks collective restraint, it risks exposing how little leverage OPEC now wields over its own producers.
Iraq has already openly discussed leaving OPEC if the group refuses to allow Baghdad to raise output significantly. Other members may increasingly ask whether the benefits of membership outweigh the constraints.
OPEC has emerged from the Iran war diminished. The scramble among Gulf producers to regain market share in the aftermath risks accelerating the unravelling of the 66-year-old organisation, reducing it ever further from market manager to paper tiger.
Courtesy: www.reuters.com
