JP Morgan expects Brent Crude to hit $85 a barrel over the next six months—with a spike to $90 likely—as the investment bank raised its oil price projections to reflect expectations of more Iranian oil barrels coming off the market when U.S. sanctions on Iran return in early November.
In its latest note, JP Morgan raised its Brent Crude forecast to $85 over the next six months, up from a previous forecast in the low $60s, expecting the Trump Administration to be tougher on Iranian sanctions than previous administrations. According to JP Morgan, a spike of Brent to $90 is likely, the analysts said in a note, as carried by Business Insider.
The investment bank now sees the U.S. sanctions cutting Iran’s oil exports by 1.5 million bpd due to the tougher U.S. policies on Iranian oil customers as they succumb to U.S. pressure and cut off oil trading with Iran, and it sees the U.S. Administration less likely to grant waivers to Iranian oil buyers.
“The main driver of this revision is a higher estimate of how much Iranian crude exports might decline due to multi-country respect for US sanctions that should come into effect on November 4th,” JP Morgan said in the note.
The U.S. equity market resilience and the strong economy could embolden U.S. President Donald Trump on all fronts, including NAFTA negotiations, tariffs, and Iran, according to JP Morgan analysts. The result of this overconfidence would be a risk of “a major miscalculation from sanctions that are tough to calibrate,” according to the investment bank. Related: How The Sahara Could Power The Entire World
While initial estimates of Iranian oil export losses were closer to 500,000 bpd, now more analysts are expecting that the losses could be higher than 1 million bpd.
The market will lose “well over 1 million” bpd from Iran with the sanctions, and “that can’t be made up,” John Kilduff of Again Capital told CNBC earlier this month, expecting WTI Crude prices at the end of this year at $85 to $90, and Brent Crude at $95 to $100.
RBC Capital Markets expects the losses of Iranian oil to exceed 1.2 million bpd in the first quarter of 2019, and Iran’s reaction to the U.S. sanctions in November could lead to some sort of “unintended military escalation,” which the markets are currently underestimating.
By Tsvetana Paraskova for Oilprice.com
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Despite extensive pressure by President Trump on OPEC members particularly Saudi Arabia to force oil prices down and save his neck in the Congressional midterm elections in November, his efforts have so far failed miserably. The reason is simply that the global oil market fundamentals are bullish enough not only to withstand his pressure but to counterattack and push oil prices higher.
JP Morgan’s projection that US sanctions on Iran could reduce Iranian oil exports by up to 1.5 million barrels a day (mbd) is not only wishful thinking but utterly based on faulty assumptions.
US sanctions on Iran are doomed to fail and Iran will not lose a single barrel from its oil exports. My reasoning is based on five market realities.
The first is that the overwhelming majority of nations of the world including US allies and major buyers of Iranian crude are against the principle of sanctions on Iran as unfair and will not therefore comply with them and will continue to buy Iranian crude whether in violation of the sanctions or by a US waiver as would be the case with Japan, South Korea and Taiwan.
The second is the petro-yuan which has virtually nullified the effectiveness of US sanctions and provided an alternative way to bypass the sanctions and petrodollar.
A third reality is that China which is being subjected to intrusive US tariffs and Russia which has been battling US sanctions since 2014 will ensure the failure of US sanctions against Iran as a sort of retaliation against US tariffs and sanctions against them.
A fourth reality is that China can singlehandedly neutralize US sanctions by deciding to buy the entire Iranian oil exports amounting to 2.5 mbd as a retaliation against escalating US trade war against it and paying for them in petrodollar.
A fifth reality is that 95% of Iran’s oil exports go to countries who declared that they will not comply by US sanctions, namely China (35%), India (33%), the European Union (20%) and Turkey (7%). The remaining 5% of Iran’s oil exports goes to South Korea and Japan who have already said they will apply for a US waiver and most probably they will get.
Dr Mamdouh G Salameh
International Oil Economist
Visiting Professor of Energy Economics at ESCP Europe Business School, London