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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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Did Trump Just Kill The OPEC Deal?

Trump

Trump’s decision to kill the Iran deal could put an end to the OPEC agreement.

As has been widely discussed in the aftermath of President Trump’s decision to withdraw from the Iran nuclear deal, the return of sanctions on Iran could disrupt oil shipments, with estimates ranging from essentially nothing to as much as 1 million barrels per day of Iranian supply going offline.

But the decision also could put an end to the OPEC agreement.

Saudi Arabia could be the biggest beneficiary of Trump’s decision, not just because from a geopolitical perspective (Saudi Arabia has long wanted the U.S. to confront Iran), but because any decline in Iranian supply will push up prices, dealing a financial windfall to Riyadh without any sacrifice.

Indeed, Saudi Arabia has wanted higher oil prices for some time, with rumors that it was targeting $80 per barrel, or even $100 per barrel. Saudi Arabia needs higher oil prices to fill budget gaps, and it also wants to ratchet up prices ahead of the Aramco IPO. Just as with Venezuela’s plunge in output, any unexpected outage in Iran will be a boon for Saudi Arabia.

However, even as the Saudis are set to enjoy a wave of revenues from higher prices, their gambit also carries risks.

There seems to be some sort of agreement between the U.S. and Saudi Arabia that if Washington takes the fight to Iran, Saudi Arabia would step in to prevent a crude oil price spike, a perennial problem for U.S. politicians. U.S. Secretary of Treasury Steven Mnuchin said on Tuesday that he does not expect an increase in oil prices because “we have had conversations with various parties ... that would be willing to increase oil supply.” He omitted which parties he was referring to, but it is safe to say that he was talking about Saudi Arabia.

Shortly after that statement, Saudi Arabia issued a statement of its own, saying that it “will work with major producers and consumers within and outside OPEC to limit the impact of any supply shortages,” a Saudi energy ministry official said on Wednesday, according to Reuters. Related: Saudi Arabia's Needs Have Become Iran's Problems

Wednesday afternoon, Saudi oil minister Khalid al-Falih went further, tweeting that OPEC and Russia would “ensure market stability.”

And as John Kemp of Reuters points out, this arrangement clears up the tweet from President Trump in April in which he blasted OPEC for high prices. “In retrospect, the president’s tweet on April 20 blaming OPEC for high oil prices can be seen as part of the negotiating process to reach an understanding with Saudi Arabia,” Kemp wrote for Reuters.

The implication is that the U.S. will work to isolate Iran, potentially curbing supply by hundreds of thousands of barrels per day. Saudi Arabia would resolve any price spike by adding barrels back onto the market.

But if Saudi Arabia ramps up output, it would essentially have to back out of the OPEC agreement. Any unilateral increase in supply would violate the spirit of the pact, and would likely lead to less restraint from other members. Recognizing the risk here, a source told the FT on Wednesday that Saudi Arabia would not increase supply on its own, and would instead work with OPEC and Russia to coordinate their action.

There would seem to be a reasonable amount of time for OPEC to plan for these events since U.S. sanctions have a 180-day grace period. However, the U.S. Treasury said that it expects countries to begin reducing their purchases of Iranian oil well ahead of the 180-day timeline if they want any chance of obtaining a waiver. That means countries could begin reducing purchases of Iranian oil immediately. Related: Trump Tears Up The Iran Deal

In other words, there is a chance that Iranian supply goes offline before the 6-month deadline. But with the oil market already tight – and greater losses expected from Venezuela – the existing OPEC deal may have to be tweaked sooner than expected.

The group has already been under scrutiny because inventories have fallen back to the five-year average. There was some risk that OPEC could let the market tighten too much. The prospect of outages in Iran significantly boost those odds.

To avoid the entire group returning to full production, there would need to be some sort of adjustment to the production limits for all of the participating countries. But it isn’t as simple as merely adjusting the output limits higher – it was incredibly difficult to get all OPEC members on board for the original agreement. Any changes will be problematic. The other possibility is that OPEC members simply start to cheat, even if the deal remains unchanged.

Either way, to the extent that the Trump administration succeeds in knocking a significant chunk of Iranian supply offline, it would dramatically accelerate the timeline of the phase out of the OPEC agreement.

By Nick Cunningham of Oilprice.com

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  • Alex Mageau on May 09 2018 said:
    an extremely pretentious headline, dont you think? The opec deal would be even more important when stabilising prices as another producer leaves. The deal would simply be modified
  • thecrude on May 09 2018 said:
    Right Russia wants to help against Iran. rofl.
  • Mike Holloway on May 09 2018 said:
    "dealing a financial windfall to Riyadh without any sacrifice."
    I'm sure Orange Mussolini will be well compensated in the most secret way possible.
  • GeoMatt on May 09 2018 said:
    The biggest oil markets/consumers are not yet driven by US policies. Also there are lots of black markets where they can sell oil but maybe for a lower price. But there are big negative consequences for this like funding terrorism related activities which can be evident from the recent happenings in some countries.
  • citymoments on May 10 2018 said:
    With all due respect to his great work by the author, I just like to add the followings:

    1. Though it may be true: Iran, under the New USA Sanction, might not honor her OPEC cut agreement, the tightness of global oil supply will not be lessened by increasing Iran oil production.

    2. The critical consideration here is we must truly understand: any significant scale of international crude oil export can only be transacted between nations in US dollar. With this important understanding in mind, it is matter of a fact to conclude: No other country dares to buy oil from Iran as USA FED reserve has the option to deny any nation's accesses for USA dollar currency exchanges if they are not following the USA sanctions.

    3. Most European nations will have no options but follow USA sanctions by sourcing oil from Saudi or Russians as Euro is not reserve currency, it is useless for international trade.

    4. The only option is for Iran to sell most of their oil to China using the new Petro Yuan exchange in Shanghai, though China will be reluctant to do so if USA FED refuses to supply China with USA dollar as China need dollar to import huge amount of commodities and energies for her economic expansion.
  • petergrt on May 10 2018 said:
    The answer to the headline is: absolutely.

    While the market is acting as if Iranian oil is already leaving the market, the sanctions are not even expected to fully kick in in 180 days, if at all.

    The Persians will use this 180-day transition to sell as much oil as they can physically muster, as well as to setup for future deliveries outside of the PetroDollar system.

    And in the meantime, the OPEC and others that are a party to the 'agreement' would feel justified in pumping more, as the battle for market share will reignite.
  • Mamdouh G Salameh on May 10 2018 said:
    No President Trump did not and he can’t kill the OPEC deal. You are jumping the gun, Mr Cunningham, by basing your views on two assumptions: one is that the re-introduction of US sanctions on Iran will lead to a loss of Iran’s oil exports, and the other is that Saudi Arabia will raise its oil production to benefit from a so-called decline in Iranian oil exports and thus leading to the collapse of the OPEC/non-OPEC production cut agreement. However, both assumptions are hypothetical and far from reality. Let us examine both assumptions.

    First, contrary to analysts’ and bank’s projections, Iran will not lose a single barrel of oil exports. More than 75% of Iran’s oil exports go to China and the Asia-Pacific region while the remaining 25% go mostly to the European Union (EU). China, India and other Asia-Pacific region countries as well as the EU are not going to comply with US sanctions and reduce their imports of Iranian crude. While most major buyers of Iranian crude will continue to do so, Japan and South Korea might decide to comply with US sanctions and shun Iranian crude. However, this will be more than offset by increased imports of Iranian oil by China, India and other Asia-Pacific countries as well as the EU.

    Second, while Saudi Arabia would welcome the opportunity to boost production to offset a so-called decline by Iranian oil exports, other OPEC and non-OPEC members particularly Iraq and Russia respectively would like also to share in this benefit. In such a hypothetical situation, Saudi Arabia would not benefit much and would have, therefore, to balance any benefits from increased production against a collapse of the OPEC/non-OPEC production cut agreement. The agreement buoyed by positive oil market fundamentals has pushed up oil prices above $77 a barrel. A collapse of the agreement risks bringing back glut to the market with very adverse repercussions for the Saudi economy which suffered most from the 2014 oil price crash and the economies of OPEC members. Furthermore, if claims by the EIA about rising US oil production are true, then the US can offset a so-called decline in Iranian exports without Saudi Arabia risking the collapse of the OPEC/non-OPEC agreement.

    On balance, I believe Saudi Arabia will not risk the collapse of the production agreement which it has worked tirelessly with Russia to bring it into existence for a short-term benefit just to score points against Iran and to please President Trump.

    The pre-Iran nuclear deal’s sanctions worked against Iran’s oil exports because of a combination of the EU’s sanctions on global insurance companies insuring Iranian oil cargoes and US sanctions on banking making it difficult for Iran to receive payments for its oil imports in petrodollar. The EU is not going to walk away from the Iran nuclear deal and therefore it will not be imposing any sanctions on Iran thus further weakening US sanctions.

    Moreover, Iran will be using the petro-yuan for payment for its oil exports thus bypassing the petrodollar altogether and nullifying the impact of the sanctions.

    Dr Mamdouh G Salameh
    International Oil Economist
    Visiting Professor of Energy Economics at ESCP Europe Business School, London
  • Fred Lamprecht on May 10 2018 said:
    Excellent, well written article. We need more stories from you Nicholas, keep up the good work.
  • richtfan on May 10 2018 said:
    one thing that I didn't see even mentioned was the fact that US shale production can get back on line fairly quickly. There are lots of rig operations that have been shelved solely because the price went so low. saudi arabia flooded the market to drive out US shale producers. some have not stopped their flow of oil. some did. but if it appears that the market will support prices between $45 and $60 per barrel, shale rigs will ramp up again to take advantage of the price. this will further drive down and stabilize the markets.

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