How the Saudi-Iranian agreement will impact oil markets

This includes the need for balance in oil markets, global security, and economic stability.

Russia becomes China's largest supplier

The remarkable thing also is that Russia was China's largest supplier of crude oil in the first two months of 2023. According to data from the General Administration of Chinese Government Customs, the average for January and February was 1.94 million barrels per day, which is about 24 per cent more than the 1.57 million barrels per day in the corresponding period of 2022. Last year, Russia was China's second-largest oil supplier after Saudi Arabia.

Saudi Arabia ranked as China's second-largest oil supplier in January and February of this year with 1.72 million barrels per day, which is slightly less than the 1.81 million barrels per day last year. In 2022, Saudi Arabia was China's largest oil supplier, with a daily average of 1.75 million barrels. 

It is worth mentioning that Russia owns a pipeline extending from eastern Siberia to the Pacific Ocean, with a length of 4800 km, through which Russia exports oil to China, while Saudi oil is transported to China by sea via giant oil tankers. However, the difference is negligible between the two largest oil producers in the world, Saudi Arabia and Russia, in the competition over the Chinese market. 

The dynamic and seasonality of oil markets changed during a year of economic sanctions imposed on Russia due to its war on Ukraine. 

A strong partnership was formed between Russia, as one of the world's largest oil producers and the world, and the world's second and third largest oil consumers, China and India, which may take the market to unknown vestibules that cause it to hunker down a little.

Read more: Moscow and Beijing team up on the Middle East and South-East Asia

It is worth noting that India consumes more than 5 million barrels per day, while China consumes more than 15 million.

Oil market predictions

The Saudi-Iranian agreement may lead to a change in the map of oil markets, along with geostrategic changes in the Arabian Gulf region.

Iran needs to restore normal relations with its surroundings in light of its domestic turmoil, its inability to contain the crisis, and the international blockade it is experiencing due to sanctions.

Read more: Why global sanctions on Iran matter

Therefore, the return of Saudi-Iranian diplomatic relations raises many questions related to the future of the oil industry and its production in the region.

Will we see a different oil market as the market dynamics change with the change in the seasonality of demand and the effects on supplies?

Will the waterways of the world's largest oil exports (such as the Strait of Hormuz) become safer, which will reflect positively on the stability of energy security and the global economy?

Nearly 20 per cent of all crude oil and refined petroleum products transported by sea pass through the Strait of Hormuz, according to the US Energy Information Administration.

Read more: The invisible war in Middle East waterways

How will the quantities of oil in the spot market, which is more vulnerable to economic and financial sanctions because it is under the control of the dollar, be affected?

Part of crude oil is sold through long-term sales contracts from the national oil companies in the Arabian Gulf, especially Saudi Aramco. Because the quantities of barrels sold are fixed, they are not affected by fluctuations in oil prices or changes in refinery profit margins.

As for the barrels sold in the spot (physical) market, they are exposed to fluctuations in oil prices and the element of competition.

Will we witness the return of international oil companies to upstream investments in Iran?

Since the mid-1970s, during the reign of the Shah of Iran, the oil industry infrastructure in Iran has suffered from a lack of development due to the absence of upstream investments.

The dilapidated infrastructure of the Iranian oil industry and old export facilities prevented Tehran from raising oil production to more than 3.8 million barrels per day since the lifting of economic sanctions in early 2016.

Production later dropped to two million barrels per day, according to the International Monetary Fund, after the return of economic sanctions with the administration of the Former American President Donald Trump.

It is worth mentioning that even with the negligence of the current US Democratic administration regarding the imposition of harsh economic sanctions on Tehran, oil production did not exceed 2.5 million barrels per day due to the reluctance of international oil companies to invest upstream and their exit from Iran, which reflects Iran's inability to substantially increase production.

On the one hand, the Saudi-Iranian diplomatic agreement is expected to help boost global energy security after securing the most important waterways for oil exports from terrorist operations.

Read more: Will the Saudi-Iran deal reshuffle the regional security deck?

On the other hand, it will encourage the return of upstream investments after the reluctance of some international oil companies due to the Covid-19 pandemic, at a time when there is an increasing need for new oil exploration that can compensate for the shortfall in oil supplies resulting from the depletion of traditional oil fields.

But the question remains: Will economic and security benefits brought on by the Saudi-Iranian agreement be hindered by Western parties trying to impede any prosperity and progress for the region?