US Oil Sanctions on Iran Loom Over the Markets (November 4) - 30/10/2018

Micro Analysis

30 October, 2018

For General Information only. Not Intended to Provide Trading or Investment Advice. Your Capital is at Risk.

US President Donald Trump decided to withdraw the US from the Iranian nuclear deal on May 8. Donald Trump said that they will reinstate tough sanctions on Iran with a number of analysts believing that Iran’s oil industry could be seriously affected. In fact, on November 4, 2018, a second set of sanctions is expected to start on industries such as shipping, oil, petrochemicals and the energy sector. The US will pursue efforts to reduce Iran's sale of crude oil. Iran is the third-largest producer in the Organization of the Petroleum Exporting Countries (OPEC) and estimates of its crude exports in October vary by more than 1 million barrels per day (bpd). That amount is enough to cover the oil demand of Turkey and move prices in the 100-million-bpd world market. Just for the record, before Trump’s May announcement of the sanctions, Iranian exports were above 2.5 million bpd. Iran's seaborne crude exports have now fallen from a 2018 peak of just over 2.5 million bpd in May to around 1.5 million bpd in September and October, Eikon data showed.

What are US allies doing?

Earlier this year the US administration started to press their allies to stop purchasing oil from Iran or face sanctions themselves. By doing that, US President Donald Trump would increase sanctions’ impact on Iran. With just days to go before U.S. sanctions take effect on Iran's oil sector on November 5, however, Tehran’s top two customers (India and China) are resisting Washington’s call to reduce purchases to zero, arguing there are not sufficient supplies worldwide to replace them. While two of Iran's other big customers in Asia (Japan and South Korea) have already stopped purchasing Iranian oil, the prospect of continued sales to China and India, the two biggest customers, appears to have bolstered confidence in Tehran.

China imports between 500,000-800,000 barrels a day from Iran or about $1.5 billion worth every month.

India, Iran’s second-biggest oil customer after China, also has traditionally close relations with Tehran. Its official stance is that it does not recognize "unilateral" sanctions that are not imposed by the United Nations. But New Delhi also has sought to appease Washington recently by curbing its Iranian oil imports and seeking waivers from the sanctions so it can continue importing some Iranian oil. India is in a vulnerable position because it imports 80 percent of its oil needs. India typically imports over 500,000 barrels per day of Iranian oil but has reduced that level in recent months.

Turkey, Iran’s fourth-biggest crude buyer, is also ready to defy U.S. sanctions, which Turkish President Recep Tayyip Erdogan has openly criticized. Turkey, like India, is seeking a waiver from U.S. sanctions, but officials said they are not sure they will get one.

Saudi Arabia, Iran's rival both in oil and Middle Eastern political matters, on the other hand, reportedly is seeking to entice Tehran's big Asian customers by offering to make up oil shortfalls coming out of Iran. With renewed American sanctions on Iran's energy sector set to take effect in November, the Trump administration has called on its allies in Saudi Arabia to boost output and keep oil prices under control. Saudi Arabia is the only producer with enough swing capacity to fill the expected gap once sanctions take hold, and Crown Prince Bin Salman told Bloomberg that Riyadh and its partners have more than offset the recent declines in Iranian exports. He suggested that Saudi fields can produce an additional 1.3 million bpd if needed, nearly enough to offset recent Iranian exports of 1.7 million bpd.

In the period between February and October (a period dominated by rumors and speculations about US sanctions on Iran), crude oil prices rose 30.0%, hitting an almost four-year high of $76.90 on October 3, 2018.

Could Oil Prices Go UP?

  • In the period after November 4, 2018 Iranian Oil export falls below 1 million barrels per day, causing a major oil supply disruption on global basis
  • US allies (China and India in particular) comply with US calls to reduce their oil purchases from Iran
  • Saudi Arabia fails to increase their production quickly to compensate production losses in Iran
  • Other OPEC countries (Iraq, Kuwait, Libya, Nigeria and etc.) fail to increase their production due to lack of capacity, which could maintain oil supply disruptions.
  • Russia maintains current oil output levels unchanged below 12 million barrels per day

Could Oil Prices Go Down?

  • In the period after November 4, 2018 Iranian Oil export remains above 1 million to 1.5 million barrel per day, keeping global oil supply smooth
  • US allies (China and India in particular) do not comply with US calls to reduce their oil purchases from Iran and continue to buy oil from Iran
  • Saudi Arabia manages to increase their production quickly to compensate production losses in Iran, injecting at least 1.3 million barrels per day more to global oil markets.
  • Other OPEC countries (Iraq, Kuwait, Libya, Nigeria and etc.) decide to keep up with Saudi Arabia and increase production to meet global demand
  • Russia increases oil output levels to meet demand from Asian counties such as China, Japan and South Korea.

Other Geopolitical and Fundamental Factors

Could Oil Prices Go UP?

  • Worries over the oil production crisis in Venezuela have kept investors concerned. Venezuela pumped 1.45 million barrels per day in August, and the year-to-date average stands at 1.544 million barrels per day. This is a far cry from the figure from five years ago, when its daily average was 2.9 million barrels per day. Venezuela faced new sanctions from the USA after Nicolas Madura got re-elected as President of Venezuela.
  • Nigeria and Libya suffer political problems of different sorts, and each could see either a recovery in production or further disruptions.
  • OPEC meeting on December 6, 2018 could send prices either direction. OPEC countries will be expected to discuss the possible impact of US sanctions on Iranian and OPEC’s oil production and exports, after which they will decide whether higher oil output is needed or not. If they decide not to increase production further, oil prices could be expected to rise.

Could Oil Prices Go Down?

  • US oil production kept rising, hitting recently a new record high of 11.20 million barrels per day. As the number of active oil wells rises, it seems US production is set to continue to rise, too. Most recent data showed the number of active oil rigs went up to 875, which is the highest since March 2015. The USA is now the second largest oil producer in the world, with a possibility of soon overtaking Russia, which produces a little over 11 million barrels per day. Meanwhile, oil inventories in the US remained high, totaling 422.787 million barrels. Although below the 2017 peak of 534 million barrels, there is still a number of analysts who believe that this number is too high.
  • US President Donald Trump kept pressuring Saudi Arabia and OPEC calling on them via his Twitter account to increase production and thus lower oil prices. He should be expected to continue pressuring them as that can help him get an increased number of votes at the upcoming Midterm Elections in the US.
  • The OPEC meeting on December 6, 2018 could send prices either direction. OPEC countries will be expected to discuss the possible impact of US sanctions on Iranian and OPEC’s oil production and exports, after which they will decide whether higher oil output is needed or not. If they decide to increase production further, oil prices could be expected to fall.

What Are Some Possible Scenarios?

Oil Prices Go UP

  • SCENARIO 1: If Iranian oil export falls below 1.00 million barrels per day after November 4, 2018 and US allies comply with US calls to reduce oil purchases from Iran, Crude oil prices could be then expected to re-establish above $70.00 a barrel.
  • SCENARIO 2: If Iranian oil exports fall below 1.00 million barrels per day after November 4, 2018 and Saudi Arabia and the rest of OPEC fail to compensate for oil production losses from Iran, Crude Oil prices could be then expected to jump to $75.00 a barrel.
  • SCENARIO 3: If Iranian oil exports fall below 1.00 million barrels per day after November 4, 2018 and Saudi Arabia, the rest of OPEC producers and Russia fail to compensate for oil production losses from Iran, Crude Oil prices could be then expected to jump to $80.00 a barrel.

Oil Prices Go DOWN

  • SCENARIO 1: If Saudi Arabia manages to increase their production quickly to compensate for production losses in Iran, injecting at least 1.3 million barrels per day more into global oil markets, Crude oil prices could be then expected to stay lower, below $70.00 a barrel, targeting $60.00 a barrel.
  • SCENARIO 2: If Iranian oil exports remain above 1 million to 1.5 million barrels per day after November 4, 2018 and If Saudi Arabia manages to increase their production quickly to compensate for possible production losses in Iran, Crude oil prices could be expected to slip below $60.00 a barrel.
  • SCENARIO 3: If Iranian oil exports remain above 1 million to 1.5 million barrels per day after November 4, 2018, If Saudi Arabia manages to increase their production quickly to compensate for possible production losses in Iran and US allies comply with US calls to reduce oil purchases from Iran, Crude oil prices could be expected to slip towards $55 dollars a barrel.

What Happened Last Time When US Imposed Sanctions on Iran?

  • 2010-2012: Riots and protests from the Arab Spring and Libyan civil war disrupted the region's output. US imposed sanctions on Iran. Oil prices rose from $65 to above $110 a barrel.
  • 2013-2016: Strong production in the USA and Russia negatively pressured oil prices. In January 2016 US lifted sanctions on Iran. Oil prices collapsed to their lowest since 2003 (WTI Crude falls to $26.00 a barrel)
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