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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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U.S. Sanctions Could Add $50 To Oil Prices

Iran oil refinery

The oil industry might not be able to produce enough oil to meet global demand in a few years’ time.

To be sure, much of the oil world is focused on the supply fears in the near-term. The outages in several OPEC nations, plus the tightening noose on Iran from the U.S. government, could lead to a supply shortfall towards the end of this year, a hole so big that Saudi Arabia could struggle to fill it, even if it burned through much of its spare capacity.

But over the long-term, there are also questions about the global oil industry’s ability to supply enough oil to the market.

It isn’t the same “peak oil” theory as yesteryear, but there certainly seem to be echoes of that argument bubbling up the surface once again. While the world isn’t running out of oil, there could be a shortage of cheap oil by the early part of the next decade. The majors have cut spending on exploration and development so drastically that there will be a dearth of new large-scale projects coming online in the next few years.

And the new hyper-focus on profitability at the expense of growth, a mantra pressed upon oil companies by restive shareholders, could keep supply constrained.

The IEA has repeatedly warned over the past few years that U.S. shale growth would likely plateau in the 2020s, which means that the world would be right back to where it started – dependent on oil-producing nations in the Middle East. There are some shale boosters that see nothing but sunny days ahead for U.S. shale, but a lot of other market watchers see shale flattening out in the next decade before entering into an extended period of decline. After that, as the IEA has argued, the Middle East will once again be the supplier of last resort. Related: How Bad Is Iran’s Oil Situation?

The problem is that the supply crunch might be so severe that Saudi Arabia won’t be able to come to the rescue.

“Something like shale oil…it is not going to really create a major dent in total global supply requirements up until 2040,” Saudi Aramco’s CEO Amin Nasser said in an interview with the Financial Times. “Everybody needs to do his share…We will contribute, but how much we will contribute?” he said, a recognition that Saudi Arabia won’t be able to do it alone.

U.S. shale growth over the past decade has been so explosive that it helped crash oil prices in 2014. But the supply surge masks “chronic underinvestment,” Sanford C. Bernstein & Co. analysts wrote in a note last week. The investment manager said the newfound focus on profitability, which has led a long list of oil and gas companies to deprioritize growth, could create the conditions for a major supply crisis.

“Investors who had egged on management teams to reign in capex and return cash will lament the underinvestment in the industry,” the analysts wrote. “Any shortfall in supply will result in a super-spike in prices, potentially much larger than the $150 a barrel spike witnessed in 2008.” Related: Russian Oil Production Soars To 11.193 Million Bpd

Of course, for many, this is a problem for another day. The oil market is arguably facing a supply crisis right now. Until recently, the oil market assumed a loss of about 0.5 mb/d from Iran because of U.S. sanctions. But statements from the U.S. government about “zero tolerance” towards Iran could mean that those losses will end up being much higher. Just by shifting the supply outages from 0.5 to 1 mb/d would translate into an oil price increase of about $8 to $9 per barrel, according to Bank of America Merrill Lynch.

“We estimate that every million b/d shift in [supply and demand] balances would push the oil price by $17/bbl on average. So based on those assumptions, we estimate zero Iran exports could push oil up by $50/bbl if Saudi caps out. We expect in this game of chicken, someone will blink before that happens.”

In other words, if Saudi Arabia is unable to plug the deficit, the U.S. would likely have to back down on its “zero tolerance” policy towards Iran. The oil market is too tight, and the supply gap would be too large. Cutting Iran exports by that much, in an increasingly tight oil market, would send prices skyrocketing, something that the Trump administration probably won’t be able to stomach. If Trump proceeded, a price spike of that magnitude would lead to a meltdown in demand.

By Nick Cunningham of Oilprice.com

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  • Neil Dusseault on July 09 2018 said:
    "OPEC+ Production Could Remove $50 From Oil Prices"

    Does this offend anyone?
    I just read an article posted earlier today here on OilPrice.com mentioning $250 oil.
    Not too long ago on this site, an article was posted about the "realities" of $300 oil (Pierre Andurand).

    So, we're now speculating on adding $50 to prices that are already nearly triple what they were from the lows of February 2016 and $30/bbl higher than they were last Summer on WTI? That's an approx. 70% increase!

    I'm forced to remind everyone yet again:
    As of today, according to RJ O'Brien, the margin requirements for 1 contract of WTI for August delivery (front-month) is approx. $3,245 + round-trip commissions and fees.

    That means that those who trade WTI are the ones who determine the price of this globally used commodity, and currently they are only paying about $3.25/bbl or less than 8 cents a gallon; whereas everyone USING oil is paying ~$74/bbl.

    My point? Perhaps we should all be discussing oil at $3.25/bbl before we all are meant to think and feel as though we need to to the bidding for OPEC+ and hedge fund managers.
  • hayes on July 09 2018 said:
    The Green River Shale has more oil than all of OPEC put together. If the technology advances where it can be extracted at good enough price point it is good night to all the fearmongering. You are beating this drum hard, which is bordering on Art Berman territory.
  • Mamdouh G Salameh on July 10 2018 said:
    Even if we assume that US sanctions on Iran could succeed, it is a flight of fantasy to claim that oil prices could rise by $50 a barre.

    But since we live in the real world, US sanctions are doomed to fail thus adding nothing to the oil price. I have argued frequently why US sanctions will not cost Iran a loss of even one barrel of oil.

    The oil market has not re-balanced yet completely. There is still a bit of glut in the global oil market capable of taking care of outages in Venezuela, Libya and Nigeria. Moreover, these outages are not new. They have been factored long time ago by the global oil market so they will hardly have any impact on oil prices.

    Western media is doing its utmost to fake news purporting that major oil importers of Iranian crude like Japan, India and South Korea have already decided to stop imports of Iranian crude.
    Nothing is further from the truth. First India announced that it doesn’t recognize any sanctions but UN sanctions and that it will not only ignore US sanctions on Iran but will continue to import Iranian crude.

    Now the South Korean Embassy in Tehran has denied that South Korea would stop buying crude from Iran in anticipation of US sanctions.

    A heavy weight like Japan is also trying to find a way around a complete cut of Iranian imports.

    The overwhelming nations of the world will ignore the US call to halt imports of Iranian crude. That is why US sanctions against Iran are doomed to fail.

    However, nobody is paying enough attention to a fast-approaching oil supply gap probably by 2020. This is due in large part to an oil investment drought since the 2014 oil price crash. This is exacerbated by the fact that the rate of new oil discoveries is at its lowest level in more than 70 years.

    And by 2020, 15 million barrels a day (mbd) of new oil supply may be needed to meet a projected annual average rise in global oil demand of 1.70 mbd and also offset an annual natural depletion rate in global oil production estimated at 5% or 4.8 mbd, virtually equivalent to Iraq’s output.

    A lack of investment will cause oil production to decline steeply and 80% of the current new oil supply is needed to offset natural declines. In such a situation, it will be no surprise if oil prices hit the levels they reached in 2008, namely $147 a barrel by 2025 and we know what a disaster it brought on the global economy.

    Only a fair price for oil ranging from $100-$130 a barrel could encourage global investments. Such a price will be good for the global economy as it enables oil-producing nations to explore for new oil and expand their production capacities to meet global demand and also enables major oil companies to balance their books and invest in new projects around the world.

    Dr Mamdouh G Salameh
    International Oil Economist
    Visiting Professor of Energy Economics at ESCP Europe Business School, London
  • Jeffrey J. Brown on July 10 2018 said:
    In regard to global supplies, the data strongly suggest that actual global crude oil production has been on an "Undulating Plateau" since 2005, while condensate and NGL, both byproducts of natural gas production, have continued to increase.

    Following is a link to a graph showing global natural gas production and global Crude + Condensate (C+C) production from 2002 to 2017:

    http://i1095.photobucket.com/albums/i475/westexas/Global%20Gas%20and%20CC%20Production%202002%20to%202017_zpslzwt5i6f.jpg

    The most common dividing line between Crude and Condensate is 45 API gravity, but the crude oil distillate yield drops off considerably just going from 39 API to 42 API, and based on the most recent EIA data (April, 2018), about 43% of US Lower C+C production exceeds 42 API gravity, which is the maximum API gravity for WTI crude oil (versus about 35% in April, 2015).

    In other words, about 43% of what the EIA calls Lower 48 "Crude oil" production is to light to be sold as WTI crude oil in 2018, versus about 35% in 2015. At this rate of increase, in about two years half of US Lower 48 C+C production will exceed the maximum API gravity for WTI crude oil.

    In regard to global data, the rate of increase in global gas and global C+C production from 2002 to 2005 were identical, at 3.3%/year.

    But from 2005 to 2017, the rates of increase diverged considerably, with global gas production increasing at 2.4%/year from 2005 to 2017, while global C+C production increased at only 0.8%/year, one-third of the rate of increase in global gas production.

    Given that condensate is a byproduct of natural gas production, in my opinion the only reasonable conclusion is that actual global crude oil production has probably been on an "Undulating Plateau" since 2005, with rising condensate production accounting for virtually all of the slow post-2005 increase in global C+C production, and note that annual Brent crude oil prices averaged $110 from 2011 to 2013 inclusive (remaining at $99 in 2014).

    In other words, there were considerable financial incentives to increase actual crude oil production post-2005. Also, note the flat global C+C production from 2015 to 2017, versus rising global gas production, which implies a probable slow decline in actual global crude oil production from 2015 to 2017.


    Regarding US supplies, here is a link to and an excerpt from an April, 2018 article:

    http://markets.businessinsider.com/commodities/news/us-oil-industry-mismatch-to-benefit-some-shale-producers-2018-4-1021516367

    Super-light crude is flooding the US oil market, and there's little demand to meet it.

    All of the industry's growth in the US over the last year was thanks to crude with a gravity above 40 on the American Petroleum Institute's scale, which measures the weight of a petroleum liquid compared to water, according to analysts at Morgan Stanley.

    That's a problem for domestic shale explorers. Most refineries in the US are designed for heavier crude grades, around 32 API. And refiners are running out of room to process super-light shale without seeing losses.

    "Domestic refiners cannot take much more of this and are close to hitting the 'shale wall,'" the analysts said.

    Options to export what US refiners don't want are limited. Demand for superlight crude outside of the US is modest.
  • Eric Staib on July 10 2018 said:
    $50 extra? This is just freakin clickbait. I’m disappointed in you Nick.
  • Manny on July 10 2018 said:
    The entire US shale oil industry is a scam, a latter-day Ponzi scheme. The industry has burned through billions of dollars and has never made a profit regardless of whether the price of oil was high or low. Depletion rates are appalling; more and more wells have to be drilled just to maintain the same level of production.
  • Sam194275 on July 11 2018 said:
    It is not US it is them, them being, the Political Leadership in The District of Columbia and the Judges, nationwide, who support them.
    "Americans," that is, we, the people, we have always begged bring the boy's home, stay out of other peoples business, let us build our nation and let them build theirs. But no, there's no money for them in that, doing what the Lord God Rothschild in The City of London tells them to do, now for them, that really pays off. For US and the rest of the world, a disaster, a truly bloody mess, too often the blood of innocent children, mothers and dads.
    How long will it take, it is already too long, we are already too far gone, still, doubt destroys hope.

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