Political tensions and military conflict in the Middle East has long been thought of as a reliable indicator of near-term crude price spikes. Simply put, the more conflict there is in the Middle East, according to conventional wisdom and the unanimous verdict of history, the higher prices should go.
But for the first time in history, that’s not true now.
Why? Look first at the competition between Saudi Arabia and Iran to be the dominant country in the region.
While Iran has spent years under international sanctions, keeping its oil largely out of the international market, Saudi Arabia has been aggressive in gaining and protecting market share, even when that caused prices to drop because of an oversupply in the market.
As crude prices began to fall below the $100 per barrel mark in late 2014, Islamic State militants also began sweeping into Libya and Syria.
Despite the growing threat posed by Islamic State and its affiliates in the Middle East, prices didn’t rise, they kept falling.
ISIS attacks have closed Libya’s major oil ports the oil-rich country’s production first started dropping after dictator Gaddafi was overthrown in 2011 and two rival governments began competing for power.
According to the U.S. Energy Information Administration, Libya’s crude production averaged slightly more than 400,000 barrels per day from January to October 2015, a huge slide from the 1.65 million bpd the country was pumping in 2010.
Crude prices have continued to fall as U.S., French and Russian forces have increased air strikes against IS in Syria in the wake of the terrorist attacks in Paris last month.
According to the U.S. Energy Information Administration, Syrian oil production has “essentially ceased” since 2014, falling from an overage of 400,000 bpd from 2008 to 2010 to barely 25,000 bpd.
But the Saudis kept a steady eye on arch rival Iran. Here’s what they saw.
Iranian production has held steady at about 2.8 million barrels per day in 2015 over the last three years, but still down from historical highs of about 6 million bpd.
With western sanctions now lifted and Iranian leaders working hard to court foreign investment, the country hopes to add another 500,000 barrels per day in production over the next few months.
But here’s really no telling how long it will take the country to return to pre-sanction production levels.
Even growing violence in Iraq, the holder of some of the largest crude reserves in the Middle East, has failed to stop the price slide.
Iraq a managed to grow production from about 2.4 million bpd in 2010 to almost 3.4 million bpd in 2014, making it the second largest OPEC producer.
OPEC as a whole broke production records last year and steadily pumped above its 30 million barrel per day target for most of 2015.
Saudi Arabia, the largest OPEC producer and second largest producer in the world as of 2014, shattered its own daily production records last year.
Another factor strongly contributed to the glut in supply and plunge in prices: The rise of U.S. shale producers.
Although U.S. production growth is expected to slow this year, the EIA still anticipates U.S. crude oil production to reach 9.2 million bpd in 2016, despite the country’s rig count shedding over 1,000 rigs since last year.
U.S. crude and liquids production even managed to outpace Saudi Arabia in 2014, with the U.S. becoming the world’s largest producer.
Just how committed are the Saudis to keeping their markets out of Iran’s hands?
OPEC has no formal mechanisms to impose target production level and late last year the group did away with any mention of production targets as Saudi Arabia continued to defend its record-breaking production levels.
All Saudi Arabia can do at this point is stick to using its production muscle to defend market share and wait out low prices, a tactic it has stood behind even when faced with criticism from fellow OPEC members.
Meanwhile, oil prices languish near 13 year lows, prompting firms of all sizes to cut budgets and push back projects.
With no oil majors committed to new projects in Iran it’s anyone’s guess just how long it will take Iran to reclaim a top spot among international proudcers.
Cheap oil may delay a new flood of Iranian crude but, at this point, the return of Iran as a major producer is just a matter of time.