In its latest monthly oil production update, OPEC reported that its crude oil output increased by another 240,000 barrels a day in October to 33.64 million barrels a day, a new record high, with Nigeria, Libya and Iraq driving the supply boost and with total production about 1 million barrels higher than the plateau agreed upon in Algiers at the end of September.
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As a result of OPEC's relentless increase in total output, the cuts OPEC would need to enforce to reach the Algiers output target just get bigger and bigger...
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... most of it is as a result of soaring Iranian oil exports - by roughly 1 million bpd - since the easing of sanctions by the Obama administration:
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It is also the reason why oil has continued to slide in recent weeks, as the upcoming OPEC production cut (or even freeze) - which will have to be shouldered almost entirely by Saudi Arabia due to production cut exemptions granted to other states, most notably Iran - has lost almost all credibility with the market.
Suddenly, however, there is a ray of hope in OPEC's dark world, and it comes courtesy of president-elect Donald Trump, who just may eliminate as much as 1 million barrels of OPEC oil output, or the cartel's entire excess production, should he undo the Iran nuclear agreement, which is extremely unpopular in GOP circles.
Recall that Trump's stated number one priority from his pre-election circuit has been to dismantle the "disastrous" Iran deal - although as Bloomberg notes, his to-do list might have changed since saying that back in March. And, as Bloomberg's Julian Lee calculates, confirming our math from just right after the Algiers (non) deal, tearing up the Iran nuclear agreement would remove almost a million barrels a day of supply at a stroke: a million barrels is about the same size as the cut OPEC needs to make.
The next question: can Trump actually undo Obama's landmark Iran nuclear agreement? According to Lee, the answer is yes, "despite assertions to the contrary from Iran's President Rouhani and a slew of analysts." Here's how:
The Joint Comprehensive Plan of Action, as the deal is snappily titled, wasn't ratified by Congress, but brought into force by President Obama via executive order. Trump could rescind that. The fall-out would be messy, but it could be done (in theory). Related: Shell Tops Ranks Of Ideal Oil, Gas Employers
There is a second way as well, enshrined within the agreement itself. The dispute resolution mechanism allows any signatory to refer a perceived breach of the deal's terms to the joint commission created to oversee the accord. If the complaining party isn't satisfied with the outcome and believes the breach constitutes "significant non-compliance", it can refer it to the U.N. Security Council. The Security Council would then vote -- and here's the killer blow -- - not on whether to re-impose sanctions, but on whether to "continue the sanctions lifting."
That might not sound like a big difference, but it's critical. By framing the vote this way, the U.S. could, in theory, veto the resolution. All the U.N. sanctions on Iran would then be re-imposed.
Should Trump proceed down this path, it would leave only EU sanctions, which prohibited the importing of Iranian oil into EU countries. And while one might expect a European backlash against unwinding the deal - after all it would remove much of the marginally cheapest oil available to European refiners - it may not be very effective, because as BBG adds, "the tortuous process of re-establishing Iran's oil trade with Europe shows that only too clearly."
Although there were willing buyers and a very willing seller, the difficulty came in finding insurers who would underwrite the transactions, or shippers to carry the crude. All the big re-insurers had at least some U.S. involvement and they were extremely hesitant to pick up the business -- even with the apparent backing of the Obama administration. They would drop the business like a scalding hot potato if the new president killed the deal. End of Iranian oil flows to Europe. Related: The Catastrophic Consequences Of Peak Oil Demand
And it wouldn't be just Europe: Asian buyers, who in the past were threatened with the loss of access to the U.S. banking system to persuade them to cut their purchases of Iranian, promptly abandoned Tehran supplies. They likely would again.
Sure, there would be a reciprocal response, as any attempt to end the deal by Trump would prompt Iran the retaliate and abandon its own commitments. Coming shortly before Iran's presidential election in May, it would be a huge boost to Tehran's hardliners. In Bloomberg's estimates, "you'd expect life to become more difficult for the Americans in Iraq, where it's engaged alongside Iranian-backed militias in ousting Islamic State from its last stronghold in the country - another Trump priority."
Ironically, such an act by Trump would make him Saudi Arabia's best friend overnight: should the president-elect remove the burden from the Kingdom to cut its own production by as much as 1 million bpd and shift it to Iran, whose output would be forcibly cut, the Saudis would not only preserve their market share, but enjoy the price of crude soaring back into the mid to upper $50-range. As such, it is unclear if Trump would enjoy being perceived as a hardliner on Iran, yet one who indirectly helps support the nation that has been the most vocal supporter of the Clintons, Saudi Arabia.
Finally, and speaking of the public, any escalation between the Trump administration and Iran which would send oil prices higher, while great for U.S. oil, would be frowned upon by U.S. motorists, who would have to pay more at the pump. The decision who to please will ultimately be Trump's to make.
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