Saudi Arabia is incapable of offsetting all of Iran's crude oil supplies, according to the latest oil market message shared by several analysts who spoke to CNBC. Based on this, the analysts said, Brent crude could very well hit US$100 a barrel before this year's end. Yet nothing is certain, and this uncertainty will only deepen as the Iran sanction launch approaches. It may turn out that things are not what they seem.
Market players have been toying with the idea of US$100 oil ever since President Trump pulled the United States out of the Iran nuclear deal. Since then, we have had one OPEC+ meeting where Saudi Arabia and Russia assured the market that there would be enough oil to keep prices steady. We have also had a string of increasingly alarmist headlines quoting unnamed sources from Indian and, most recently, a Chinese refiner, who said they were cutting their intake of Iranian oil, heightening concerns that Iran's exports may be restricted more than originally feared.
In June, few were willing to question Saudi Arabia's claim that it had enough spare capacity, and that it could ramp up production utilizing that capacity to reach more than 12 million bpd should the need arise. Now, however, there are doubts. Stephen Brennock from PVM Oil Associates said in a research note that this "focus will turn to meek levels of global, or more accurately, Saudi spare capacity."
Indeed, compared with the grimmer estimates of 2 million bpd in lost Iranian supply, 1.5 million bpd is a modest amount. Yet it is a little early to assume as much as two million barrels in daily supply from Iran will be lost.
TankerTrackers, for one, reported last month that there were more than a dozen Iranian tankers that had gone offline in the Persian Gulf. Now, while some of these may very well be storing oil offshore, others may just as well be on their way to an import destination. Related: Underwhelming OPEC Fuels Oil Price Rally
One recent news report that basically put a stick of dynamite under Brent came from Reuters, which quoted anonymous sources from Sinopec as saying that China's biggest crude oil refiner would slash its oil imports from Iran to as little as 130,000 bpd. This, however, is based on calculations made by Reuters, which used "the prevailing supply contracts" between Sinopec and the National Iranian Oil Company.
Last week, Bloomberg also added fuel to the flames of bullish sentiment by quoting (again unnamed) sources from Indian refiners as saying they still have not ordered Iranian oil cargoes for delivery in November. The shocking headline, however, may be a bit premature. Remember those offline tankers? Besides them, a New Delhi government official told Reuters at the time that there had been no decision to stop buying Iranian crude. Later, Iran's Foreign Minister said that India would continue to buy Iranian crude despite the sanctions.
Who are we to believe? The very fact that this question needs asking explains why prices could hit US$100 before the end of 2018, regardless of the actual supply situation. It would take until at least the end of November for anyone to gather enough meaningful-and reliable-tanker data to determine how much Iranian oil is being lost. By that time, Brent may be testing US$90, judging by how the news of Saudi Arabia and Kuwait discussing the addition of 500,000 bpd to their combined production within a couple of months failed to have any negative impact on prices. Quite the contrary, Brent started this week with another gain, now trading at over US$83 a barrel. The market may be panicking, and where there is panic, common sense and logic are out the window. Brent may very well reach US$100, at least until reality settles in, demand slumps, and prices find their way back down.
By Irina Slav for Oilprice.com
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Irina is a writer for Oilprice.com with over a decade of experience writing on the oil and gas industry. More
Comments
I am on record having repeatedly been saying that US sanctions against Iran oil exports are doomed to fail and that Iran will not lose a single barrel from its oil exports. I based my reasoning on five market realities which I will repeat for the benefit of readers and analysts alike.
One reality is that the overwhelming majority of nations of the world are against US sanctions on Iran as unfair and will not therefore comply with them.
A second reality is the petro-yuan which has nullified US sanctions and enabled Iran to bypass the sanctions and the petrodollar altogether.
A third reality is that China could singlehandedly nullify US sanctions by buying the entire Iranian crude oil exports amounting to 2.21 million barrels a day (mbd) and paying for them in petro-yuan.
A fourth reality is that China and Russia which are being subjected to intrusive US tariffs and sanctions respectively will ensure the failure of US sanctions against Iran.
The last reality is that 95% of Iranian oil exports go to China (35%), India (33%), the European Union (20%) and Turkey (7%) and all of them have announced that they will not comply with the sanctions. The remaining 5% goes to Japan and South Korea and both said they will apply for a US waiver and they will get it.
Saudi Arabia claims it has a production capacity of 12.5 mbd. This can’t in any stretch of the imagination be true because despite repeated calls by President Trump to Saudi Arabia to significantly increase its oil production so as to save his neck at the coming Congressional midterm elections in November, it managed to add only 400,000 b/d to the market and even these did not come from new production but from oil stored on board tankers or on land. Saudi oil production peaked at 9.6 mbd in 2009 and has been in decline since.
Therefore, Saudi claim of having a 2 mbd-spare capacity is very doubtful and is yet to be tested by the market.
The price of oil is heading beyond $85 a barrel and it could even break through the $100 in the early 2019.
Dr Mamdouh G Salameh
International Oil Economist
Visiting Professor of Energy Economics at ESCP Europe Business School, London
You told us a good story... liberating them from Sodom!!
Saddam was USA's person and USA brought up destruction and death to Iraq.
Today is your time to go out.
Their net exports of total petroleum liquids (BP data base) increased from 7.1 million bpd in 2002 to 8.7 million bpd in 2005 as annual Brent crude oil prices increased from $25 to $55 per barrel, but their net exports have been below the 2005 level for 12 straight years, through 2017, averaging only 7.9 million bpd for 2006 to 2017 inclusive.
Note the large increase in Saudi net exports from 2002 to 2005 as annual Brent crude oil prices approximately doubled, but as annual Brent crude oil prices doubled again, from $55 in 2005 to $110 for 2011 to 2013 inclusive, Saudi net exports averaged only 8.0 million bpd during this three year period of triple digit oil prices.