The price of oil could fall as low as $25 a barrel by March as Iran begins to ramp up output after the removal of international sanctions as early as next month, a senior Iranian oil official has warned.
Fereidun Fesharaki, a former oil adviser to the Iranian prime minister, said he expected crude prices to drop to between $25 and $30 between now and March as excess Iranian output exacerbates a widening global supply glut.
The price of a barrel of Brent crude fell a further 5 per cent yesterday to hit $32.16 at one point, the lowest level since April 2004, amid growing fears about weakening demand from China as its economy slows. It later recovered much of the lost ground in London, rising to $34.15.
Dr Fesharaki, the Iranian chairman of FGE, an energy consultancy, said that Iran would have no problem boosting output by half a million barrels per day within one week of sanctions being lifted. “The Iranians are ready to bring 500,000 barrels per day and they already have customers lined up,” he said.
He said that Iran had already secured firm buyers for its oil in Greece, Italy, Turkey, Sri Lanka, South Africa and South Korea, amplifying political tensions with Saudi Arabia. In response, the kingdom has been slashing prices for its crude in Europe as it jousts with Iran, its regional rival, for oil customers. Dr Fesharaki said that Japan was also keen to place orders for Iranian crude but had been reluctant to do so before sanctions are formally removed, to avoid conflict with US officials.
Last night the Saudi riyal hit a record low against the US dollar, amid growing fears that the 70 per cent slide in oil prices since June 2014 could force the country to devalue its currency.
One year dollar/riyal forwards surged to as high as 900 points, smashing a previous record of 850 points set in 1999. The riyal has been pegged at 3.75 to the dollar since 1986, but confidence has drained away in recent months as big hedge funds and banks have started betting on an eventual devaluation.
Adding to the growing sense of crisis in Saudi Arabia, the nation’s powerful deputy crown prince said that the kingdom was considering a partial privatisation of Saudi Aramco, the state-owned company that is the world’s biggest oil producer.
In a rare interview, Mohammed bin Salman told The Economist: “That is something that is being reviewed, and we believe a decision will be made over the next few months.”
Saudi Arabia is battling to stem a growing deficit because of the weak oil price. It has already announced a string of measures designed to balance its finances, including cuts to fuel subsidies and the sale of other assets such as state-owned airports.
Norbert Rücker, head of commodities research at Julius Baer, the Swiss bank, blamed the latest price falls on increasing pessimism about the prospects for global growth, which have fed into a sharp sell-off this week in financial markets. “The oil market seemingly has become more pessimistic on the world growth outlook and oil demand prospects than most other financial markets,” he said.
The Saudi-Iran deadlock had further demolished hopes that the Opec cartel of oil producers would come to an agreement to curb output this year. “The cartel’s dysfunction and the fact that the incentives within the Middle East are to produce more rather than less have been evident for some time,” he said.
