On May 2nd 2019, U.S. Secretary of State, Mike Pompeo, announced the end of the Iran oil export sanctions waivers. Iran immediately responded setting a 60-days before restarting to increase the uranium enrichment. Waiting for the next OPEC+ meeting on June 30th 2019, what are the most important geopolitical consequences of the Trump’s Administration decision?
Firstly, it is important to analyse the possible countermoves that the Russian Federation could implement, after having become the real balance needle in the oil market, because of the victory in the Syrian war. In order to do it, a step back must be taken. On November 30th 2016, the OPEC+ Group reduced its output by approximately 1,800,000 b/d with the aim of increasing barrel prices at that time under $50/b. This deal lasted till June 2018, achieving quite positive results in behalf of the producers. In particular, OPEC decided to cut the production by 1,200,000 b/d, fixing its extractive ceiling to 32,500,000 b/d, while the non-OPEC producers – led by Russia – slashed their output by 558,000 b/d. The implementation of this policy by the OPEC+ Group marked the end of the previous OPEC strategy, which were strongly carried on by Saudi Arabia and its Gulf allies from November 30th 2014. In particular, it consisted in flooding the oil market in order to drop barrel prices thus expelling high cost producers and putting into financial straits countries with a high break-even-price such as Iran, which in those times was under the prior U.S. sanction regime (Obama Presidency) and the EU oil embargo. The entrance of the Russian Federation into the Syrian war on September 30th 2015 in support of President Bashar al-Assad changed the destiny of the conflict and brought about the November 2016 OPEC+ deal as mentioned above, which excluded Iran from the cuts due to an explicit political choice imposed by the Kremlin over the Organization of the Exporting Countries. For these reasons, it is hard to imagine that Russia – which fixed its State budget balance at $40/b and has been currently making high profits – will also abandon Iran to its destiny, by not supporting its close ally in the region and in the Syrian war too. On the contrary, it is more probable that Russia will help Iran in finding some middlemen to export its crude. Taking into account the latest OPEC+ deal signed on December 7th 2018 (-1,200,000 b/d), which will be in place at least till June 30th 2019, Vladimir Putin said that the market will eventually avoid the deficit of Iranian oil and that Iran will still be able to sell it.
Secondly, the impression is that China, which is the world Iranian crude purchaser leader, is not disposed to comply with the latest U.S. oil sanctions over Iran. “China’s cooperation with Iran is open, transparent, reasonable and legitimate, and should be respected”, Foreign Ministry spokesperson, Geng Shuang, stated on April 21st 2019. According to the statistics published by the Chinese General Administration of Customs, the country imported the record high of 10,640,000 b/d in April 2019. At the same time, China’s crude oil imports from Iran surged to 800,000 b/d, which is the highest level since August 2019. Is Trump ready to ruin the chances of a trade deal with China? In accordance with the Il Sole 24 Ore, on May 7th and 8th 2019, China government sent a clear message to the White House, by not participating to the U.S. competitive bidding. The consequence was that the 10 year U.S. T-bond interest reached 2,479% in comparison with the foreseen 2,46% (the highest surge since August 2016).
Apart from the weight of this last aspect, the impression is that Israeli Prime Minister, Benjamin Netanyahu, put a lot of pressure over Pompeo during their last meeting held on March 20th 2019 in Jerusalem, both over the end of the Iran sanction waivers and over Israeli Sovereignty of Golan Heights too. However, Israeli’s and U.S.’s interests do not always coincide. Trump must take into account that an Israeli and Saudi attack towards Iran would also mean an aggression over the so called Chinese Belt and Road Initiative, of which Iran (as Syria) is a fundamental hub.
Last, but not least, someone should explain to the EU that, unlike the United States of America, the European nations have significant economic interests to lose in Iran.
Latest data and estimates on oil & gas
Thanks to the figures provided by the Oil Market Report, published in the International Energy Agency on April 11th 2019, world oil supply dropped by 340,000 b/d in March, to 99,200,000 b/d (3,100,000 b/d below November 2018 level and 530,000 b/d more y-o-y). In particular, OPEC output fell by 550,000 b/d, to 30,100,000 b/d. OECD commercial stocks fell by 21,100,000 barrels in February 2019 (month over month), after three months of consecutive increases.
Global oil demand growth in 2018 and 2019 is respectively forecast at 1,300,000 b/d and 1,400,000 b/d with China and India again leading the surge.
Based on the Drilling Productivity Report figures issued by the Energy Information Administration on April 15th 2019, the American unconventional crude output is expected to increase by 80,000 b/d to 8,460,000 b/d in May 2019.
The U.S. crude production, after the former peak of 9,627,000 b/d gained in April 2015, decreased to its lowest of 8,428,000 b/d on July 1st 2016. It then started increasing to 12,300,000 b/d, which was reached on April 26th 2019 (weekly forecasts).
Thanks to the statistics provided by Baker Hughes on May 10th 2019, the 988 current U.S. active rigs, of which 805 (81.5%) are oilrigs and 183 (18.5%) are gas rigs, were 18 less than March 29th 2019, the lowest level since March 9th 2018, dropping for a fifth week in a row. On April 26th 2019, Bloomberg anticipated that the decreasing was due to the fact that, “operators shifted focus from production growth to cash flow”.
In February 2019, U.S. crude oil imports strongly dropped to 6,652,000 b/d. They were 7,520,000 b/d in January 2019. The 2019 U.S. crude oil imports average stands at 7,086,000 b/d, on the fall in comparison with 7.757.000 b/d in 2018 and 7,969,000 b/d in 2018.
Oil and currency trends
In April 2019, barrel prices rose, reaching a six-month-high. In particular, Brent North Sea quality opened the listings at $69.22/b and closed at $71.68/b, while West Texas Intermediate crude started the quotations at $61.74/b, closing at $63.56/b. At the time of writing (May 13th), Brent was trading at $71.20/b and WTI at $61.88/b.
On April 24th, the European and Asian benchmark gained its maximum at $74.59/b, whereas the day before the American grade topped its record at $66.09/b. Oil prices increased because U.S. President, Donald Trump did not roll over Iran sanction waivers before they expired on May 2nd 2019. The waivers were granted on November 5th 2018 to eight countries: China, India, South Korea, Japan, Taiwan, Italy, Turkey and Greece.
Moreover, the oil market was characterized by other bullish factors such as:
1. The escalation of the Libyan war;
2. The OPEC+ cuts established at the end of 2018 (-1,200,000 b/d);
3. The U.S. sanctions imposed on Venezuela;
4. The temporary reduction of the U.S. tight oil output by 100,000 b/d in mid-April.
The slight fall in oil prices occurred at the end of the month was due to the surge in U.S. commercial stocks from 455,154,000 barrels to 460,633,000 barrels (+ 6,860,000 barrels).
In the wake of this latest data publication, Carsten Fritsch, financial analyst at Commerzbank, said, “The situation in the oil market has calmed down. Apparently, the global oil market is sufficiently supplied”. However, as was previously stated by Olivier Jakob, market strategist at Petromatrix, the decision to let the waivers expired was a “bullish surprise for the market”.