The United States and Iran are in the final stages of agreeing on a new nuclear deal that could see the return of Iranian crude on international markets, which some analysts say would result in downward pressure on oil prices–an eventuality Saudi Arabia is trying to avoid. Still, other analysts suggest that the return of Iran to oil markets could be completely irrelevant for prices. Earlier this month, Saudi Arabia’s energy minister Abdulaziz bin Salman hinted that OPEC+ could decide to reverse its production growth strategy in response to what he called "a self-perpetuating vicious circle of very thin liquidity and extreme volatility" on oil markets.
The news sent Brent over $100 per barrel after the international benchmark slipped below that threshold amid deepening fears of a global recession. It was this fear that led to the divorce between paper and physical markets that bin Salman referenced in an interview with Bloomberg last week, when he noted that traders are ignoring the tightness on physical oil markets.
Meanwhile, however, some analysts have suggested that the Saudis are getting nervous about a potential Iran deal that would see their arch-rival in the Middle East join international oil markets legally
The Financial Times reported last week, citing several analysts, that bin Salman’s hint about a production cut was, among other things, aimed at the White House as a warning of what would happen if the United States does end up sealing a deal with Iran.
“Earlier this year I think it’s fair to say Saudi Arabia and other regional actors were reasonably confident the Iran deal wasn’t going to happen in the near future,” RBC Capital Markets’ Helima Croft told the FT.
“Now that the negotiations have been revived I think they will be focused on both the oil market and the wider security implications of this deal potentially getting over the finish line,” she added.
Yet in the context of security implications, it is worth noting that there has been a thaw between Iran and Saudi allies. Just this month, Iran restored diplomatic relations with the United Arab Emirates—the closest Saudi ally in the Middle East—and Kuwait. Next on the agenda is Saudi Arabia itself and the Iranian side has signaled optimism about this development.
In other words, Saudi Arabia and Iran are taking steps to restore bilateral relations after these were severed in 2016 after the execution of a Shiite Saudi cleric in the Kingdom. This, if it happens, could have huge implications for the security situation in the Middle East and it will also consolidate OPEC. Such a consolidation would arguably render a new nuclear deal with Iran irrelevant for oil prices.