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No, The Oil Glut Hasn’t Disappeared

Weaker than expected oil demand…

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Iran’s Oil Exports Implode As Sanctions Sting

Early data suggests data suggests…

Nick Cunningham

Nick Cunningham

Nick Cunningham is a freelance writer on oil and gas, renewable energy, climate change, energy policy and geopolitics. He is based in Pittsburgh, PA.

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Trump’s Iran Decision Could Kill The OPEC+ Deal

Trump’s decision to let Iran waivers expire could kill off the OPEC+ deal while dealing a serious blow to the coalition’s ability to coordinate production cuts.

The Wall Street Journal reported that the Trump administration’s decision to let waivers expire “surprised buyers and others who had been told by State Department officials in recent weeks to expect a renewal of exceptions.”

The White House said that Saudi Arabia and the UAE have agreed to offset lost barrels from Iran, although Saudi Arabia was more measured in its response, saying only that it would add supply if needed. In theory, Saudi Arabia could add a few hundred thousand barrels per day above current levels and still keep output below its ceiling as part of the OPEC+ deal, but that may not be enough to compensate for outages in Iran, which could be significant. After all, the whole point of the U.S. campaign is to take Iranian oil exports to zero, down from roughly 1.3 mb/d in March.

“Saudi Arabia is currently producing approx. 500,000 barrels per day less than stipulated in the production cut agreement. Saudi Arabia could increase its output by this amount without any problem,” Commerzbank said in a note. “Any more pronounced rise would violate the agreement and could spark considerable turmoil within OPEC. It remains to be seen whether Saudi Arabia will be prepared to do this.”

If Saudi Arabia went beyond its ceiling, it would likely fatally wound the OPEC+ deal, so it’s unlikely that they would do this without consulting with OPEC6+. Regardless, the optics of Saudi Arabia coordinating with the U.S. could immediately undermine the OPEC+ group. Saudi oil minister Khalid al-Falih went to lengths to try to assuage the concerns of the group, stating that Saudi Arabia would “coordinate with fellow oil producers to ensure adequate supplies are available to consumers while ensuring the global oil market does not go out of balance.” Related: Why The Argentinian Shale Boom Isn’t Taking Off

That likely means that Saudi Arabia won’t act unilaterally and won’t act preemptively. Having been burned last year by the Trump administration, Riyadh will surely wait until actual barrels are knocked offline before it opens the taps. And any supply increase would likely come under the auspices of coordinated action as part of the OPEC+ forum. Saudi Arabia could add some supply over the next month or two ahead of the June meeting in Vienna, but any increase will probably be small and still in compliance with the agreement.

Riyadh is trying to pull of a difficult balancing act. “Saudi Arabia is now in a difficult position of having an alliance with Russia to reduce oil supplies and having an alliance with the U.S. to increase supplies,” Oliver Jakob, head of PetroMatrix GmbH, told Bloomberg. “You can’t have it both ways for too long.”

Already, cohesion was showing signs of fraying. Russia has previously said that it would not sign on to overly tightening the market. News that Saudi Arabia may work with the Trump administration, whether that interpretation is fair or not, could undermine willingness to keep curtailments in place. “Russia’s willingness to cut in order to support the oil price probably vanishes around $65/bl,” Bjarne Schieldrop, chief commodities analyst at SEB, said in a statement. Schieldrop says that Russia will probably boost production in the second half of the year.

If the Saudis are seen as going too far to work with the American government, the rest of OPEC+ may abandon the deal, although because so many producers are in pretty bad shape and can’t increase output, it’s not clear what that means in practice.

At the same time, Saudi Arabia is still under pressure from Washington to head off a painful price spike. Related: Can Saudi Arabia Still Sway The Oil Market?

Trump has one card left to play as leverage over Saudi Arabia. The U.S. Congress has demonstrated some semblance of bipartisan support for the NOPEC legislation, a bill that would remove sovereign immunity from OPEC members as it relates to antitrust action. If passed, the Justice Department could, in theory, sue those countries for colluding to manipulate oil prices. Saudi Arabia has signaled its fierce opposition to the legislation, and Trump has yet to take a stance on it.

If oil prices rise too far, Trump may signal his support for the NOPEC bill, which could substantially boost its odds of becoming law. That threat alone could push Saudi Arabia into keeping prices in check. But again, Riyadh also has budgetary concerns as well as a strategic goal of keeping the OPEC+ group together. It’s a tricky balancing act.

Meanwhile, the decision by the U.S. government to apply maximum pressure on Iran may prevent Washington from further tightening the screws of Venezuela, for fear of tightening the oil market too much. The U.S. may have to hold off on secondary sanctions on Venezuela due to its Iran campaign, according to Argus Media.

The decision on Iran sanctions waivers has for months been cited as one of the key variables affecting the trajectory of the oil market this year. With the decision now clear, the market is heading in a bullish direction. Now the ball is in the court of OPEC and its partners.

By Nick Cunningham of Oilprice.com

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  • Mamdouh Salameh on April 24 2019 said:
    President Trump’s decision to end US sanction waivers will not end the OPEC+ production cut agreement until Saudi Arabia decides that conditions in the global oil market justify raising its oil production.

    Saudi Arabia has become very wise to the United States’ ploys. It will never permit itself to be conned again by President Trump to raise its oil production to offset a so-called decline in Iran’s oil exports until it is sure that Iranian oil exports are actually falling and that the global oil market is irrevocably re-balanced and oil prices are headed to $80 a barrel or higher being the price it needs to balance its budget.

    Saudi Arabia knows that President Trump will at some point threaten to sue Saudi-led OPEC for alleged oil price manipulation and cartel-like practices under the NOPEC legislation in order to blackmail the Saudis and OPEC members and extract some political and financial concessions from them such as abandoning the OPEC+ production cut deal.

    Therefore, Saudi Arabia should demand that the US Congress should abandon its proposed NOPEC legislation in a quid pro que for raising its oil production.

    Dr Mamdouh G Salameh
    International Oil Economist
    Visiting Professor of Energy Economics at ESCP Europe Business School, London
  • Robert Berke on April 24 2019 said:
    “What the U.S. is decreeing to the entire world with this action is that the U.S., and the U.S. alone, decides who gets to trade with who. The U.S. is telling China [along with India, Japan, S.Korea, Germany, etc -ed], the second largest economy in the world and home to over one billion people, that it lacks the sovereign authority to buy oil from Iran if it so desires. If the U.S. can unilaterally play boss on the trade decisions of foreign countries, national sovereignty does not exist in practice anywhere on the planet.” Michael Krieger, Liberty Blitzkrieg, 4.24.19.

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