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Trump’s Blow to Iranian Oil Sparks Curious Price Divergence

In this Bloomberg article written by Serene Cheong, the U.S. government’s decision to end its deal with Iranian oil exports has resulted in a demand for an alternative supply of oil. While Dubai may produce crude oil similar in quality to Iran’s crude oil, it is London’s Brent that is beginning to dominate the oil market. Even though Brent’s oil is made with different chemical components and is a lower grade than Dubai’s, it is relatively easier to produce and can be derived into different oil-based products such as diesel fuel. As a result, Brent’s oil has increased in value and has become a major competitor in the market.

In relation to CS 2850, this article about Dubai’s struggle in the oil export market is an example of Chapter 10’s prices and payoffs. In the oil market, the prices of production and transportation and the oil’s payoff are major factors for buyers. Dubai specializes in producing heavy crude oil, which is difficult to produce and limited in its derivatives. On the other hand, Brent’s light-sweet oil is much easier, and thus cheaper, to produce and is much more flexible when converting into different oil-based products. Therefore, the lower cost of production and its flexible derivative payoff are why investors are favoring Brent oil more than Dubai oil. Additionally, Dubai’s rival Oman produces crude oil similar to Dubai’s and provides negotiable shipping arrangements. Oman is thus another threat to Dubai in the market due to its potential of arranging lower shipping costs for its similar crude oil product.


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September 2018