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Michael McDonald

Michael McDonald

Michael is an assistant professor of finance and a frequent consultant to companies regarding capital structure decisions and investments. He holds a PhD in finance…

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The Oil Majors To Watch In A Trump Threatened Iran

This past Friday, President Trump issued new sanctions on Iran following their missile test on Sunday. The administration believes this to be a violation of an agreement to refrain from developing missiles, separate from the agreement to develop nuclear weapons. In response to the new sanctions, Iran held a second test the following day. The escalation does not bode well for either country, creating a tense atmosphere.

Since sanctions were lifted on Iran last year, the nation has been working to rebuild its oil supply. OPEC agreed to exclude Iran from their planned supply cut, allowing them to return to pre-sanction production levels. Brent crude prices showed a slight uptick, no more than 20 cents, on Friday with the Treasury Department’s announcement but had retracted within the hour. The sanctions were imposed strictly on 13 individuals and 12 companies believed to support and finance Iranian missile development. In no way did they limit Iran’s oil production.

The United States is the only country imposing these sanctions, less strict than the sanctions Obama and the United Nations lifted last year. To reinstate sanctions of a similar level would require a multilateral agreement from several nations, which is currently unlikely. If tensions with Iran are to continue escalating, however, this scenario may become more probable. Investors should watch for news involving the U.S. and Iran closely. In an event where Iranian oil production is to be limited again, oil prices would rise quite quickly.

OPEC’s monthly report shows Iran was producing on average 3,990,000 barrels of oil per day in November. Production has risen nearly 1 million barrels per day since 2015, quite a feat for the recovering nation. Iran is expected to pass the 4 million mark soon if it hasn’t already. The country is holding a bid on February 15th for new oil contracts. There are currently 29 companies with an interest in bidding and the number is likely to grow. Lukoil, Total SA, and Sinopec already have deals with Iran so their interest is already expected. Investors should expect profits from any of these companies. Related: Are These OPEC Members Sabotaging The Output Deal?

Investors should consider buying shares in Russian Lukoil with the upcoming bid. Russia is part of the OPEC production freeze so it’s probable Lukoil is looking for an alternative way to increase business via Iran. Shell and other America based oil companies may not be as inclined to bid. In early January, President Trump tweeted about Ford considering building a plant in Mexico. With current Iran commotions, the president may feel the need to draw negative publicity to any participating companies. A short position in shell against long Lukoil could be profitable.

It can be expected that the Iranian Rial exchange rate with the U.S. Dollar will continue its downward trend. In 2013, Iran devalued its currency against the USD by more than 50 percent. This decision was due to the fact the Iranian economy was struggling on the imposed sanctions. Without sanctions suppressing Iran’s economy, there’s a chance they could revalue their currency under better economic conditions. If Iran decides to continue escalating tensions with missile tests, then the exchange rate is sure to continue it’s descent.

By Michael McDonald of Oilprice.com

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Leave a comment
  • Kr55 on February 11 2017 said:
    Got a feeling that Trump and his friends are intentionally trying to goad Iran into violating the agreements to get the Iran oil off the market. The spite towards Obama for pushing the Iran deal through to try to put a final nail in the coffin of the industry that exclusively supports republicans is still there.
  • Tamara Sheppard on February 12 2017 said:
    It is interesting to note that the push is on to side with Russian oil companies. I wonder what Tillerson has to say about his new found financial gains?

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