WASHINGTON—American sanctions on Iranian oil, despite waivers, will create supply shock in the near term, causing crude oil prices to rally toward the end of the year, says a commodity expert.
Washington imposed sanctions on more than 700 people and entities throughout Iran’s energy sector and its broader economy. To prevent a spike in oil prices, the Trump administration granted waivers to some nations for oil imports from Iran.
Oil prices sold off sharply last week following the news that there would be exemptions. The market’s initial expectation was a more dramatic decline in global supply with fears of potentially zero Iranian exports in November.
The recent market sell-off, however, has run its course, according to Phil Flynn, analyst at Price Futures Group in Chicago.
The West Texas Intermediate (WTI) came down to $63 per barrel, losing more than 18 percent since early October. It was one of its biggest one-month declines in several years.
“The bottom line is that we’re looking at a very tight global oil market” regardless of increased production from OPEC and Russia, Flynn said. “Many parts of the world are undersupplied when it comes to distillate inventories.”
Hence, Washington had no choice but to allow some of the biggest buyers of Iranian oil to continue to import from Iran. The administration has granted temporary oil waivers to China, India, South Korea, Turkey, Italy, Greece, Japan, and Taiwan.
President Donald Trump said on Nov. 5 that he imposed tough sanctions on Iran but opted to “go a little bit slower” on oil import restrictions.
“This has nothing to do with Iran,” he said. “I could get the Iran oil down to zero immediately, but it would cause a shock to the market.”
“I don’t want to lift the oil prices worldwide by clamping down 100 percent. It will be gradual.”
Iranian exports fell steeply since Trump announced America’s withdrawal from the Iran nuclear deal in May. Iran’s crude exports fell by more than a third, from nearly 2.5 million barrels a day in April to about 1.6 million in October.
In response, major oil suppliers such as Saudi Arabia, Russia, and Iraq have boosted their production to meet the shortage. The crude oil production also reached a record high level in the United States, making the country the leading oil producer in the world in August.
U.S. crude oil production increased by 2.1 million barrels a day in the last 12 months, marking the largest year-on-year increase in the country’s history.
According to the State Department, more than 20 importing nations have already stopped buying Iranian crude, causing the Iranian regime to lose roughly $2.5 billion in revenue. Washington will continue negotiations to get all of the nations that have secured a temporary waiver to zero out their imports from Iran.
Short-Term Supply Pressure
Despite increased production from the United States, Russia, and Saudi Arabia, the oil output may not meet the winter demand, Flynn said.
“The market is too complacent right now. … We keep hearing about this well-supplied market. But what we’re hearing out of Russia is that they’re going to put an export duty on oil because they’re concerned about tightness in supply going forward,” he said.
Same for China, Flynn said; a shortage of heating fuel is hitting some regions, particularly the Western provinces of the country.
“Hence, supplies aren’t where they should be ahead of winter and we think that’s going to keep upward pressure on the prices for the rest of the year,” he said.
Flynn expects nearly a $15 increase in oil prices by the end of the year.
Rising oil prices may squeeze households but will help U.S. shale oil producers.
“The shale guys were having a hard time making money at $70. They’re going to be really losing money at $63. Unless these prices bounce back, the shale gains are going to moderate,” he said.
According to Goldman Sachs analysts, the global oil market will be in deficit in the fourth quarter, leading to a strengthening in oil prices. However, they forecast long-term prices to come back down once OPEC producers adjust their production to keep inventories stable.