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US against Iran: The Oil market's new 'Cold War'

Publication Date: 09 Jul 2018 - By Market Mogul By Market Mogul
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Macro Technical Analysis Commodity USA MENA Energy

The Iranian Islamic Republic has the world’s fourth-largest crude oil reserves, with around 10% of the global stockpiles and around 13% of the OPEC reserves. Their holdings are estimated at around 157bn barrels. Iran has suffered, though, over recent years because of international sanctions imposed to encourage it to stop its nuclear program.

In 2015 an agreement was reached, the Joint Comprehensive Plan of Action, which lifted sanctions against Iran in exchange for limitations being put on its nuclear program. In early 2016, as a result of the easing of sanctions, oil production in the Republic greatly expanded, and exports rose to around $55bn in 2017, 70% more than in the previous year.

Sanctions Ignored?

However, the US has renegade on this agreement, with Donald Trump calling it ‘the worst deal ever’. After the US withdrew, oil prices spiked. The price of a barrel of oil has gone from $50 to around $75. While the European countries decided not to follow Donald Trump, it remains uncertain if companies are willing to take the risk to be on bad terms with Washington by investing in Iran.

During an EU summit in Bulgaria, the bloc decided to counter-attack by using a 1996 law, drafted originally to provide legal cover for European companies to ignore the US blockade of Cuba, in an effort to neutralise the extraterritorial effects of US sanctions.

The principal question remains whether or not Iran will continue to sell oil to Asia. China remains the main buyers of Iranian oil, with 43% of total Iranian exports going to Beijing. In the context of a global trade war, it is not likely that the Forbidden City will stop trade with the Iranian Republic, but other countries, like Japan or South Korea, could bow to American pressure.

A world without Iranian oil

The US is producing more oil than it has ever done, though it may be reaching its maximum capacity. Venezuelan production has decreased day after day, reaching a 30 year low of only 1.5 million barrels per day. According to some analysts, extra global production capacity is around 2 to 3 million barrels per day. If Iranian production is removed from the global market, oil supply will slump by around 2.5 million barrels per day. That is why Trump has asked Saudi Arabia to increase oil production by around 2 million barrels, in order to fill the gap and maintain a stable price. Tehran has warned Saudi Arabia against this and has threatened to pull out of OPEC production agreements. Iran’s oil minister published a letter where he stated:

“Any increase in the production of a member state that goes beyond what is stipulated in OPEC would constitute a violation of the agreement.”

It remains a potent way to counteract Washington.

A victory for someone

Geopolitical factors have rocked oil markets, with tensions in Syria, Yemen, and Venezuela all having their impact. This is not to mention the brewing conflict between the US and Iran. This context has produced high oil prices compared with what they were at the beginning of the year. To argue that the forced withdrawal of Iranian oil from the market would rebalance the oil supply remains partially wrong. US producers will gain market shares, while OPEC will take advantage of the absence of Iranian oil to compensate for the excess production of some of its members.

The Trump administration has denounced an imperfect and inefficient agreement. Even if Europe tries to convince Trump to change his mind, the US wish to impose a more effective agreement with Iran remains. The consequences for the United States are double-edged. As oil prices rise, the US oil industry and in particular the growing shale oil will claim a victory. Not consumers, however, who have seen in recent months prince increases at the pump, even before the summer period of high fuel consumption.

This will certainly affect Donald Trump and the Republican Party during the mid-term elections in November. Saudi Arabia remains the big winner from this situation. Its historical rival, Iran, is weakened, and crude prices are on the up, just before the planned IPO of the world’s biggest oil company, the Saudi-owned Saudi Aramco.

This post appeared first on The Market Mogul.

 

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