If prices remain at their current level, another collapse could be around the corner, the Russian Finance Ministry has warned in a report, cited by Sputnik.
According to the report, the long-term equilibrium price level for crude oil is currently around US$50-60 a barrel, but actual prices are substantially higher than that and “the current growth should be regarded as temporary […] If oil prices continue to remain above long-term equilibrium levels, the price collapse will repeat again."
The report attributed the price rise to the sharp decline in Venezuelan oil production and the U.S. sanctions against Iran that seek to reduce oil production in the country to zero. The authors, however, noted that the next price collapse could be avoided by boosting production in countries including the United States, Angola, Canada, and Brazil.
While the Russian Finance Ministry worries about a price crash, others are warning about a spike above US$100 per barrel if Iran makes good on its latest threat to close the Strait of Hormuz in retaliation for the U.S. sanctions. Closing the biggest oil chokepoint in the world would wreak havoc on Middle Eastern shipments of the commodity, so a major price spike is very likely should that happen. Related: Russian Oil Production Soars To 11.193 Million Bpd
Of course, the likelihood of Iran actually doing this is not that substantial. That’s not just because closing Hormuz would lead to a prompt response from U.S. Navy forces in the Persian Gulf and will likely spark an open conflict in the region, but also because playing the good guy would serve Iran’s cause of victimhood much better than aggression.
Meanwhile, Iranian oil importers are preparing for the expiry of the six-month wind-down period the United States gave Iran oil importers to cut shipments from the country. Last month, the State Department toughened its stance, insisting that imports of Iranian crude be reduced to zero, which naturally boosted international prices further.
By Irina Slav for Oilprice.com
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Outages in Venezuela, Libya and Nigeria are not new. They have been factored in by the global oil market long time ago. The new developments are the re-introduction of US sanctions on Iran and Iranian threats to block the Strait of Hormuz.
Iran will not lose a single barrel of oil exports as a result of US sanctions. Iran’s trump card is the petro-yuan which has virtually nullified the effectiveness of US sanctions. Major customers like the European Union (EU), China, India, Turkey, Russia and Japan are still committed to continue importing Iranian crude. If the EU countries succumb to US pressure, then China and the petro-yuan will come to the aid of Iran. Given the current tense political and trade relations between the US and China, the Chinese will be only happy to oblige.
Furthermore, Iran already has barter trade agreement with Russia, India and Turkey. Under these agreements, it will exchange oil for food stuffs and other goods. Moreover, it will be paid in petro-yuan for its oil exports to China, euro for its exports to EU and yen for its exports to Japan thus totally bypassing the petrodollar.
The Strait of Hormuz at its narrowest point is 34 miles wide. So militarily, it is virtually impossible for Iran to block it. However, Iran can achieve its objectives by mining the Strait and hoping that one of its mines hits an oil tanker and sinks it. Alternatively, it is enough for Iran to threaten sinking one oil tanker crossing the Strait to stop oil tankers from around the world crossing the Strait even with US navy escort.
Moreover, most of the major global insurance companies would then hesitate to provide insurance cover to tankers in the face of Iranian threats thus preventing them from crossing the Strait.
Dr Mamdouh G Salameh
International Oil Economist
Visiting Professor of Energy Economics at ESCP Europe Business School, London