In the past two weeks, oil prices fell from their record level seen during the first quarter of this year (about $128 per barrel of Brent crude) to about $ 110-113 at present. The causes behind this may be attributed to the following: - The attempt by major oil-producing countries in OPEC to reduce prices to about $100 per barrel, instead of raising it to the range of $110-130, with a view to preserve the demand for oil. The Secretary-General of OPEC Mr. Abudllah al-Badri, in a speech he gave at the Petrostrategies annual International Oil Summit, said, “We are working hard to bring down the price. We're not comfortable [with the price range of $110-130]”. “We are not happy with prices at this level because there will be destruction as far as demand is concerned,” the OPEC SG also said. Al-Badri cited the price of $100 per barrel, saying that OPEC would be comfortable with it as it would suit the interests of both producers and consumers. OPEC countries have managed indeed to increase their output to 32.3 million barrels per day to provide adequate supplies of oil, a move that has helped rein in price rises. The new output is about 2 million barrels per day higher than the production ceiling agreed upon. - The ongoing global economic crisis, which has taken a turn for the worst following the French presidential election and the legislative elections in Greece. To be sure, there are fears that the new French policy led by François Hollande – which calls for more focus on growth as a means for reform- will diverge from the austerity policy pursued by former President Nicolas Sarkozy and which remains extant in Germany. Meanwhile, in Greece, elections have brought to the forefront small and radical anti-austerity parties, while incurring losses for the main two parties. This renders it extremely difficult to form a government which has a clear majority and can move forward with the austerity policy rejected by the Greek public opinion. But without such austerity measures, European and IMF loans would be suspended, which effectively means a Greek exit from the euro zone. Of course, there is also the recession in Spain, and fears of contagion affecting other countries (such as Italy) as well as the progressive negative impact of the European economic downturn on the world economy at large, and subsequently, the possibility of contraction in oil demand in particular, if prices are high. All this underscores the attempt to reduce prices to about $ 100 to maintain demand on the one hand, and to contribute to the recovery of the world economy on the other. OPEC's ministers affirm that the fundamentals of oil supply and demand do not justify the current high price level. They attribute high prices in the first quarter of this year to geopolitical factors, in particular those related to the Western-Iranian conflict over the Iranian nuclear program and the sanctions targeting Iranian oil exports, which will come into full effect starting from the first of July. In truth, prices could have gone up even more, were it not for the decisions and actions taken by major producers to preclude any shortages in global supplies. In this vein, Saudi Arabia has increased its output to about 10 million barrels per day in implementation of this policy. This increase, along with the UAE and Kuwait both producing oil at their maximum productive capacities respectively, the gradual restoration of Libyan output to pre-revolution levels, as well as the increase of Iraqi exports as a result of constructing floating export terminals, has reined in price increases within the level of $ 128 - despite the fall in Iranian exports by about one million barrels per day. Meanwhile, a positive atmosphere characterized the talks of the P5+1 (the five permanent members of the UN Security Council plus Germany) and Iran in Istanbul in mid-April, regarding the Iranian nuclear program. These talks have pushed the two sides to adopt a ‘multi-stage policy', with the United States offering – according to leaked press reports, the following terms: Halting the enrichment of uranium at 20 percent, gradually shutting down the enrichment facility at Qom, and removing all uranium enriched to 20 percent to outside of the Iranian territories. In return, if Iran accepts these demands, then the West would respond by taking ‘confidence-building' steps in the direction of the Iranian regime; and as a sign of the seriousness of these talks, it was agreed that they would resume in Baghdad on May 23rd. Despite the fact that all sides have confirmed that no agreement had been reached, this was not the objective of the Istanbul meeting at any rate. However, it is clear that the crisis between the two sides has somewhat eased, and there is an attempt at present to end it. An accord here would involve Iran agreeing to peacefully develop its nuclear technology, in conjunction with allowing the IAEA to thoroughly and extensively inspect its facilities. If this happens, there is a real possibility that oil sanctions may be reduced. This has played an important role in the rapid reduction of oil prices from $128 to $110-113. In other words, the geopolitical factor in oil prices seems to have been defused. Nevertheless, it must be stressed here that no final decision on the issue has been made so far. The odds for failure of this process remain significant, especially with the intransigence shown by the Israeli side. But what will happen then, if the talks succeed? Of course, Iran is seeking to reach a solution that would help it get rid of the sanctions. This explains the change in both its discourse and rhetoric. In the meantime, Western countries, especially the United States, do not want a new war in the Middle East that would be close in its timing to the presidential election. A publicized and clear agreement would therefore have important implications for the global oil markets over the short-term, as an agreement as such will lead to lower prices. *. Mr. Khadduri is a consultant for MEES Oil & Gas (MeesEnergy)
