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US Demands For More Oil Could Backfire

The State Department’s request for…

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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$90 Oil Is A Very Real Possibility

Refinery

U.S. sanctions on Iran could push oil prices up to $90 per barrel later this year.

The first round of U.S. sanctions on Iran just took effect, a slew of measures targeting Iran’s currency and its financial sector. The U.S. sanctioned the trading of bank notes issued by the Iranian government, the trade of gold and precious metals, any transactions involving the Iranian rial, Iran’s sovereign debt and its automotive sector.

The sanctions will tighten the screws on the Iranian economy, and the measures have already sent the currency tumbling. However, the more important sanctions – targeting Iran’s oil exports – take effect in November.

There is still a wide range of possibilities for what is set to occur over the next three months in regards to the impact on production and exports. Originally, the Trump administration stated its desire to push Iran’s exports to “zero.” The subsequent spike in oil prices forced them to backtrack quite a bit.

But, the Trump administration has made it clear that it wants to cut off as much Iranian supply as the market can bear without sending prices up too much. Those are, in many ways, conflicting goals, but it likely means that a significant chunk of Iranian production will be disrupted.

“I don’t think the market has fully baked in losses over a few hundred thousand barrels [per day]. That’s where the price impact potentially would come in,” Richard Nephew, a senior research scholar at the Center on Global Energy Policy at Columbia University, told S&P Global Platts Capitol Crude on Monday. Related: China’s Oil Futures Jump To Record High

“I think Iran will lose between 600,000 and 1 million barrels per day in exports, and that’s up from what I would have thought back in February,” he added, citing the Trump administration’s determination to push exports as close to zero as possible and the willingness from countries around the world to comply with American sanctions.

Meanwhile, U.S. shale is already slowing down, and, in fact, shale output might have been slowing much more significantly in recent months than previously thought. EIA data released last week showed only tepid growth in the Permian for May, whereas the agency had previously expected growth to be robust for that month. The pipeline constraints in the Permian are clearly already starting to bite.

In other words, the oil market could see a disruption in Iranian supply at the same time that U.S. shale output is slowing down. All the while demand continues to grow.

"As we go more towards (the fourth quarter) … that's when we really see the risk of prices going well into the 80s and potentially even into the 90s but very critical is how much Iranian production we lose," Amrita Sen, chief oil analyst at Energy Aspects, told CNBC's "Squawk Box Europe" on Monday. She expects Iran to lose between 1.2 and 1.5 million barrels per day by the end of the year compared to the April peak.

In the short run, oil prices received a lift on news that Saudi Arabia cut production in July to just 10.29 mb/d, down about 200,000 bpd from June levels. The unexpected reduction reportedly came in response to Saudi Arabia’s inability to find buyers for its oil at the price that it had wanted. Instead of offering a lower price, Saudi Arabia apparently decided to simply cutback on output.

Related: The Next Big Energy Standoff Will Happen Here

The move was not anticipated but it is an indication that Riyadh is determined to keep prices somewhat elevated, and has no interest in letting them fall ahead of the implementation of sanctions on Iran. Instead, it seems that Saudi Arabia will try to calibrate production so as to keep prices within a desired range, tweaking output up or down in a given month to achieve market “balance.”

However, that could prove difficult if the Trump administration aggressively tries to disrupt Iranian supply. Saudi Arabia, Russia and a handful of other Gulf States can ramp up output to offset the declines from Iran, “but then you are running out of spare [capacity] for accidents,” Richard Nephew told Capitol Crude. “You’re running out of spare for Venezuela. You’re running out of spare for Libya. And that’s not a great place to be. I candidly think that that is also going to start affecting prices as well.”

By Nick Cunningham of Oilprice.com

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  • Neil Dusseault on August 07 2018 said:
    Here we go (yet) again: How would you feel about a headline that read:
    "Sub-$50 Oil Is A Very Real Possibility"

    It's the same difference from where we are now, and oil has been there before too.
    All it does it seem like a cross between click-bait and jawboning.

    In the second half of 2016, there were many days when headlines read:
    "Oil up on hopes of production cuts"
    Seriously?! Is my bank account up on "hopes" of being a millionaire by doing even less?

    So, I guess we're all back to headlines that all pull from the same pool of recycled nonsense in favor of OPEC, such as:
    - Iran...I'm just curious--hasn't that all been verbally digested and priced into the market by now?
    - Libya, Venezuela, Et al. (Don't forget about Nigerian rebels! Evidently there is not a military power in the whole world capable of stopping these "Delta Avengers", so let's all just periodically allow them to halt production so that everything suddenly costs more). Really, I never expected anything from the "fragile five".

    Actually, it's just a matter of time before Kuwaiti or Norwegian oil workers go on strike, or some Northern pipeline conveniently goes offline for an entire season...perhaps headlines next will be about Canadian wildfires resulting in us all being down to the last drop of oil--oh my! :(
  • Neil Dusseault on August 07 2018 said:
    Here we go (yet) again: How would you feel about a headline that read:
    "Sub-$50 Oil Is A Very Real Possibility"

    It's the same difference from where we are now, and oil has been there before too.
    All it does it seem like a cross between click-bait and jawboning.

    In the second half of 2016, there were many days when headlines read:
    "Oil up on hopes of production cuts"
    Seriously?! Is my bank account up on "hopes" of being a millionaire by doing even less?

    So, I guess we're all back to headlines that all pull from the same pool of recycled nonsense in favor of OPEC, such as:
    - Iran...I'm just curious--hasn't that all been verbally digested and priced into the market by now?
    - Libya, Venezuela, Et al. (Don't forget about Nigerian rebels! Evidently there is not a military power in the whole world capable of stopping these "Delta Avengers", so let's all just periodically allow them to halt production so that everything suddenly costs more). Really, I never expected anything from the "fragile five".

    Actually, it's just a matter of time before Kuwaiti or Norwegian oil workers go on strike, or some Northern pipeline conveniently goes offline for an entire season...perhaps headlines next will be about Canadian wildfires resulting in us all being down to the last drop of oil--oh my! :(
  • Mamdouh G Salameh on August 08 2018 said:
    Experts and analysts including the author of this article and also Richard Nephew at the Centre of Global Energy Policy at Columbia University are parroting the same cliché about US sanctions leading to a decline in Iran’s oil exports between 600,000 barrels a day (b/d) and 1 million barrels a day (mbd). It seems to me that their projection is based on a faulty assumption and also wishful thinking.

    I keep telling them that US sanctions against Iran are doomed to fail and that Iran will not lose a single barrel from its oil exports.

    A case in point is that for more than eight months these very experts and analysts kept saying that the IPO of Saudi Aramco is going ahead and for more than eight months I kept telling them on the pages of oilprice.com that Saudi Arabia will withdraw the IPO quietly. That is exactly what happened. They were proven wrong and I was proven right.

    Now they should listen to what I am telling them about the eventual failure of US sanctions for two reasons.

    One reason is that the overwhelming majority of nations of the world including US allies and major buyers of Iranian crude such as the European Union (EU),China, India, Japan, Turkey and even South Korea are against the principle of US sanctions in general and particularly the sanctions on Iran. They are not going to comply with US sanctions and reduce their purchases of Iranian crude.

    The other reason is the petro-yuan which has virtually nullified the effectiveness of US sanctions and also provided a viable alternative to bypass the petrodollar altogether.

    Rather than stop buying Iranian crude, US allies like Japan, South Korea and Taiwan are going to seek a waiver from the US to continue buying Iranian crude and will most probably get it. And even if they stop buying Iranian crude completely which is an improbability, China will buy their share.

    It is more than a possibility that oil prices could reach $90 a barrel in 2019 but not because of the hyped US sanctions on Iran but because of the positive fundamentals of the global economy in both 2018 and 2019 aided to a small extent by geopolitical concerns.

    Against such background, it will be no surprise to see oil prices going beyond $80 this year, rising to $85-$90 in 2019 and hitting $90-$100 by 2020.

    Dr Mamdouh G Salameh
    International Oil Economist
    Visiting Professor of Energy Economics at ESCP Europe Business School, London
  • Neal Trombley on August 08 2018 said:
    Nope
  • tim johnson on August 13 2018 said:
    $90 oil a very real possibility?
    well, yeah.
    So is $40 oil.
    You know what the stock market is going to do, right?
    Fluctuate.
  • Seaman on August 19 2018 said:
    It's that moment when reading the comments is way more interesting then article itself.
    You can only guess what's the oil prices will be, the one thing is obvious - it is better for them to sale oil with 90 and get some real profits. The oil demand is at its highest of all times, the sharks have ate the small fish ( by low prices they have killed the small companies and bought their assets for almost nothing) and now they will make some money.

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