After two months of an almost uninterrupted increase, crude oil is set for even more volatility on a string of political events that could see it either touch US$80 or even higher by the end of June or, conversely, slump to deep lows again.
President Donald Trump will start unwinding the string today as he announced his decision on the Iran deal. The prevailing analyst opinion is that economic sanctions will be reinstated within the next couple of months.
While this would be naturally bullish for oil prices, some analysts note that the effect of the sanctions has already been factored into prices, so any immediate impact will be limited. What’s more, CNBC reported recently, that the effect of U.S. sanctions against Iran on the country’s international shipments of crude will also be limited: China and India are unlikely to reduce their intake of Iranian crude as are other buyers, who were previously on the U.S.’ side with regard to the sanctions.
All in all, analysts estimate that new sanctions could remove between 300,000 bpd and 500,000 bpd of Iranian crude from international markets, which compares with 1-1.5 million bpd removed from the market under the initial round of U.S. sanctions under President Obama, who had a lot more support from Western Europe.
That said, there will unquestionably be an effect on prices from Trump’s announcement. This effect could be amplified later in May, when Venezuela holds its presidential elections. The vote scheduled for May 20, and there is little doubt that Washington will question the legality of the outcome. Related: Qatar Petroleum To Boost Production Despite Blockade
Venezuela’s oil industry—like its economy—is in shambles, with production down by 50 percent since its peak in the early 2000s to 1.55 million bpd, data from Bloomberg suggests. If no radical change is made in the management of the industry and the exodus of Venezuelans to neighboring countries does not stop, Venezuelan oil production could slump to 1.38 million bpd by the end of the year, the lowest in seven decades, the International Energy Agency has warned.
Some analysts already see Venezuela as the biggest international tailwind for oil prices and respectively top cause for worry for the bears. It was thanks to Venezuela’s unwilling overcompliance with its OPEC production quota that the cartel as a whole overperformed with the cuts.
The presidential elections will likely result in a victory for incumbent Nicolas Maduro, which might spur the U.S. into further action against Caracas and cut off oil imports from the South American country. The chances of this happening are unclear, however: a ban on Venezuelan imports has been on the table for a while now but the Washington has not yet taken this step. Related: The One Nation Returning To Coal
Meanwhile, discord is brewing in OPEC between Saudi Arabia, which wants oil prices even higher, and Iran, which says a reasonable oil price is between US$60-65 a barrel. The cartel and its partners in output cut deal are meeting on June 22, and although the public message is that everyone is still on board with the cuts, Iran is not the only one unhappy with the high prices: Russia may be pressured by the state oil companies, which have already demonstrated eagerness to boost their production. Russia missed its production quota in both March and April.
A surprise at the June meeting is unlikely but not impossible. If the U.S. hits Iran with sanctions this month, Tehran may well decide to put all its efforts into holding onto and possibly growing its share on existing import markets, which would motivate it to either cheat on its quota or simply leave the production cut deal. That, in turn, would weigh on prices, especially if it motivates other OPEC members to follow suit.
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By Irina Slav for Oilprice.com
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Even with re-introduction of sanctions, Iran will not lose a single barrel of oil exports. More than 75% of Iran’s exports go to China and the Asia-Pacific region while the remaining 25% go mostly to the European Union (EU). China, India and other Asia-Pacific countries are not going to reduce their imports of Iranian crude. Moreover, the EU is not going to withdraw from the nuclear deal thus weakening US sanctions on Iran.
Furthermore, Iran will be paid in petroyuan for its exports to China and by euro for its exports to the EU thus bypassing the petrodollar and nullifying the impact of the sanctions.
As for Venezuela’s declining oil production, it has become a constant factor and has been factored in by the global oil market long time ago so its impact on oil prices is very limited.
Discord between Saudi Arabia and Iran on oil prices will neither have an impact on OPEC/non-OPEC production cut agreement nor on oil prices. Even were Iran to walk away from the production cut agreement, it can’t increase its production anyway beyond the current 3.75-3.8 million barrels a day (mbd).
Russia will stay with the production cut agreement well into the future for economic and strategic reasons despite calls by some of its companies to boost production. Russia’s compliance with the agreement should be judged by its annual average of production and not by the months of March and April where production might have crept up a bit above the annual average.
Dr Mamdouh G Salameh
International Oil Economist
Visiting Professor of Energy Economics at ESCP Europe Business School, London