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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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‘‘Psychological War’’ With Iran Fails To Move Oil Markets

The Trump administration refrained from a military strike last month, but the U.S. and Iran’s cycle of escalation continues.

Iran announced its latest plans to reduce its commitment to the 2015 nuclear deal, raising enrichment levels beyond 4.5 percent and promising to take additional steps every 60 days until Europe delivers on its promise to offer the benefits of the nuclear accord. Europe is unable to offer safe passage for Iranian oil, and the meager trade that it can secure through its nascent financial entity is not enough for Tehran.

China put the blame on Washington. “The U.S. side not only unilaterally withdrew from the agreement but also created more and more obstacles for Iran and other parties to implement the agreement through unilateral sanctions and long-armed jurisdiction,” a spokesman for China’s foreign minister said. “It has been proven that unilateral bullying has become a worsening ‘tumor’ and is creating more problems and greater crises on a global scale.”

No longer content on waiting out the Trump administration, particularly with oil exports plunging, Iran has decided to take more assertive steps. Because the U.S. withdrew from the nuclear accord last year, Iran says it is no longer bound to uphold its end of the bargain.

Iran’s new strategy involves a series of incremental but escalatory measures to put pressure on Europe to deliver. “Iran’s violation of the agreement could now prompt Europe to impose sanctions on Iran, too,” Commerzbank wrote in a note. However, France has said it would not take punitive action on Iran for now. Related: The Biggest Oil & Gas Winners In Q2 2019

But the seizure of an Iranian oil tanker last week by the UK in Gibraltar opens up another point of contention. The UK said the tanker was shipping oil to Syria, which ran afoul of EU sanctions (the incident was unrelated to U.S. sanctions). But because Iran is not a member of the European Union, Tehran says it should not be subjected to EU sanctions on oil traveling to Syria. As such, Iran argues the seizure of the oil tanker is illegal. “We will not put up with this act of marine piracy by the U.K.,” Iran’s defense minister Amir Hatami said, according to Mehr News.

The standoff could spoil the EU-Iran relationship. Bloomberg reports that an oil tanker run by BP is holding off the Saudi coast inside the Persian Gulf over fears that it could be seized by Iran as a form of retaliation. BP’s tanker had been sailing for Iraq’s Basrah terminal last week but quickly rerouted to Saudi waters.

“It’s a psychological game that’s being played,” Olivier Jakob, managing director of energy consultant Petromatrix GmbH, told Bloomberg. “Nobody wants to be that one whose vessel is seized in a ‘tit-for-tat’.” It’s unclear what happens next, but it should be a worrying sign for the oil market if Iraq’s oil exports are suddenly facing questions, although it’s likely that only British tankers would be at risk until the tanker standoff is resolved. The latest wrinkle, nevertheless, is yet another problem for shippers traveling through the Strait of Hormuz. Related: Persian Gulf Conflict Could Send Oil Beyond $325

Iran’s oil production is reportedly down to 2.28 million barrels per day, a three-decade low. But exports are a small fraction of that amount. “According to Bloomberg data, the US sanctions had driven Iranian oil exports to just under 300,000 barrels per day in June,” Commerzbank wrote in a note.

While calculations in both Tehran and Washington are mostly calibrated on the near-term, Iran has a longer-term problem from sanctions and isolation. Its oil fields are older and require more investment in order to keep production going, and can suffer from more serious depletion without upkeep. “With its oil exports further curtailed this year, Iran should worry about not only losing market share today (and for however long it takes to restore its position in the global economy), but also the possibility that output drops could cause it to lose productive capacity more permanently if oil fields are damaged from forced production curtailment or reduced spending on maintenance over time,” Amy M. Jaffe, Senior Fellow for Energy and the Environment at the Council on Foreign Relations, wrote last week.

Still, oil prices were up only slightly on Monday. Even as tensions continue to rise, traders are not overly concerned. “That the market reacts so little to the tense situation in the Middle East is a reflection of a very well-supplied market in general and a very relaxed market,” said SEB chief commodities analyst Bjarne Schieldrop. “Concern for global growth is at the back of the mind of the whole market all the time these days.”

By Nick Cunningham of Oilprice.com

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  • Mamdouh Salameh on July 09 2019 said:
    Oil prices are the best judge of the economic and geopolitical developments in both the global oil market and the world economy.

    Despite rising tensions in the Gulf, oil prices are hardly reacting. This could be attributed to three reasons. The first is the continued glut in the market. The second is the fact that US sanctions on Iran have so far failed to adversely affect Iran’s crude oil exports despite claims to the contrary. The third reason is the continuing trade war between the US and China and the fact that the Chinese leadership doesn’t trust the word of President Trump and his administration. President Trump has the tendency to say something today and then change his mind the following day, something the Chinese think it manifests a shallow intellect and a bazaar trader’s slipperiness.

    Despite the sanctions, Iran is managing very well to export large volumes of its crude oil with China, India, Turkey and to some extent the European Union continuing to import Iranian crude. Iran uses many ways of exporting its oil including barter trade, tuning off ship transponders and using mid-sea ship-to-ship transfers, supplying refined products to its neighbours and also selling directly to countries like China, India Turkey and even Russia.

    Moreover, by reducing its commitment to the 2015 nuclear deal, Iran is only responding to the United States’ unilaterally withdrawing from the deal thus violating international law and the authority of the UN Security Council which overwhelmingly approved it.

    The global economy rates the chances of a deal between a slippery Trump administration and China to end the trade this year as below 50%.

    For these reasons, oil prices could continue to range from $60-$65 a barrel unless there is an end of the glut in the market or a serious escalation of tension in the Gulf leading to military clashes or until somebody advises President Trump that without a trade deal with China soon he could jeopardize his chances of winning the 2020 presidential elections.

    Dr Mamdouh G Salameh
    International Oil Economist
    Visiting Professor of Energy Economics at ESCP Europe Business School, London

Leave a comment




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