Oil market participants had started to worry in advance about how the U.S. sanctions on Iran in November would impact global supply, causing oil prices to shoot up to four-year-highs in early October.
Just a month later, the U.S. re-imposed sanctions on Iran’s oil industry and granted waivers to the eight key Iranian oil buyers to continue importing oil at reduced rates. Oil prices then started to dive, dragged further down by fears of slowing economic and oil demand growth.
When at end of January the U.S. slapped sanctions on Venezuela’s oil industry and state oil firm PDVSA in order to deprive Nicolas Maduro’s regime of pretty much its only hard-currency income, oil prices barely budged.
Venezuela’s oil production had already been collapsing for more than two years, at a rate of around 50,000 bpd each month, due to the economic collapse and years of mismanagement and underinvestment in the oil industry. The oil market had already braced itself for continued steep declines in Venezuelan oil supply in coming months.
Ten years ago, U.S. sanctions on oil from Iran and Venezuela would have significantly shaken up the market. The reason for the relatively muted reaction this time around, as analysts told CNBC, was soaring U.S. oil production.
While U.S. crude oil production growth is mostly light crude grades, as opposed to the heavy crudes of Venezuela and Iran, gushing American output has still been capping oil prices. Despite the different crude grades of U.S. production, surging supply has given more flexibility to the U.S. Administration to impose sanctions on Venezuela and on Iran, according to analysts who spoke to CNBC. Related: Is This A Precursor For Peak Oil Demand?
OPEC and its allies’ production management policy in place since the start of 2017 has been supporting oil prices and giving U.S. producers incentives—in the form of higher oil prices—to boost shale drilling and production.
OPEC and its Russia-led non-OPEC partners have been influencing the state of the oil market with cuts or production increases, such as those just ahead of the U.S. sanctions on Iran to proactively respond to what the U.S. was promising to be “zero” Iranian oil exports.
The U.S. sanctions policies toward oil exporting nations such as Iran and Venezuela in recent months have been another major influencer on the oil market. And according to Daniel Yergin, vice chairman at IHS Markit, the record-setting U.S. oil production has given flexibility to the Administration in the sanctions.
“The extraordinary thing is it’s caused some tightness in heavy oil, and that’s been reflected but it’s not been a market moving event,” Yergin told CNBC, referring to the U.S. sanctions on Venezuela.
In an oil market already tighter on heavy crude grades due to OPEC’s production cuts and U.S. sanctions on Iran’s oil, refiners now face an even tighter supply of heavy crude with the sweeping U.S. sanctions on Venezuela’s oil sector.
Although the U.S. sanctions on Venezuela are creating a heavy crude crunch on the oil market, the EIA says that the sanctions are unlikely to have a significant impact on the refinery runs of the U.S. refiners.
The tight heavy crude market, however, has been raising the prices of sour grades, cutting into refining margins.
Although U.S. President Donald Trump has been criticizing OPEC for the cuts and for driving oil prices higher, the Trump Administration’s sanctions on two of OPEC’s members have curtailed a total of 1.6 million bpd of supply, according to Helima Croft, head of global commodities strategy at RBC. Related: Oil Prices Rise As Saudis Curb Exports
“Trump is yelling at OPEC, but Trump’s been the most effective cutter” in world oil supply, Croft told CNBC.
Yet, experts say that sanctions on Iran and Venezuela would have driven oil prices much higher if it weren’t for the soaring U.S. oil production that has been capping price gains.
Thanks to the remarkable strength in shale production, the United States will account for 70 percent of the growth in global oil production through 2024, transforming the global oil markets and trade, the International Energy Agency (IEA) said in its annual oil market forecast this week.
“This will shake up international oil and gas trade flows, with profound implications for the geopolitics of energy,” said Fatih Birol, the IEA’s Executive Director. Birol also noted: “Everywhere we look, new actors are emerging and past certainties are fading. This is the case in both the upstream and the downstream sector. And it’s particularly true for the United States, by far the stand-out champion of global supply growth.”
By Tsvetana Paraskova for Oilprice.com
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