What will the oil market be like after the US decides to end Iran's exemption period?

On Thursday (May 2), the US tightened energy sanctions against Iran, wanting to reduce its oil exports to zero and create a new era of unce...


On Thursday (May 2), the US tightened energy sanctions against Iran, wanting to reduce its oil exports to zero and create a new era of uncertainty for the oil market.

US President Donald Trump restored Iranian sanctions of Barack Obama era in 2018, but then exempted the sanctions for eight countries, allowing them to import a limited amount of oil from Iran. Last week, the US government made the market "overwhelmingly" when it announced that it did not extend the period of exemption.

The sudden move to cut Iran's oil exports is likely to cause the market to lose oil from Iran - more than 1 million barrels per day recently, equivalent to 1% of global consumption. To fill that gap and prevent fuel prices from skyrocketing, Mr. Trump turned to his ally in Saudi Arabia, the world's leading oil exporter.


However, Saudi Arabia has not made a firm commitment and continues to consider renewing the production cut agreement with the Organization of Petroleum Exporting Countries (OPEC) and other producers. This raises concerns about a period of tighter supply and higher oil prices.

Helima Croft, Head of Global Commodity Strategy at RBC Capital Markets, said in a recent research report: "The decision to deny sanctions to Iranian oil importers on May 2 2019 shows a daring act when the strategy to control oil prices now depends largely on Saudi willingness to increase oil production amid continuous disruption of global supply. ".

Oil prices initially soared to the top 6 months after Trump announced the end of the exemption period for Iran, in which Brent oil price reached 75.6 USD / barrel and WTI oil price increased to 66.6 USD / barrel. On Thursday (May 2), Brent oil price is only 71 USD / barrel and WTI oil price is 62 USD / barrel.

Tightening oil market creates risks

Analysts say that tightening sanctions alone will not cause supply shocks, but make the oil market vulnerable to supply shortages - a factor that will push costs down. higher up.

This is partly because the oversupply situation in the oil market is gradually disappearing, supply and demand are getting closer to equilibrium. Some analysts even argue that the market is a little short of supply.

At the same time, supply disruptions and threats from blackouts are happening in many countries.

The sanctions imposed on the Venezuelan PDVSA by the US have made crude oil production in Venezuela fall without braking. In Libya, conflicts between opposition leaders also threatened oil supplies. Nigeria - Africa's largest oil producer - also experienced a power outage.

In Europe, the amount of oil transferred from Russia has been polluted and disrupted refining operations in some countries.

Meanwhile, OPEC and its allies - including Russia - are still trying to cut 1.2 million barrels a day out of the market.

Saudi Arabic

Mr. Trump is putting pressure on Saudi Arabia and OPEC to change their strategy, but many analysts still do not think the OPEC + coalition will follow.

OPEC + raised output before the United States re-imposed sanctions on Iran in November 2018, but was surprised when Trump exempted sanctions for eight countries that imported oil from Iran. Oil from OPEC and weaker sanctions are expected to cause Brent oil prices to fall from 86 USD to 50 USD / barrel and urge producers to agree to cut production in December 2018.

Saudi Arabia needs oil prices around $ 80 a barrel to balance the budget. Saudi Arabia's powerful Oil Minister, Khalid al-Falih, stressed that Saudi Arabia would act ahead of a supply shortage.

This signaled that Saudi Arabia is considering raising oil supplies, Bill Farren-Price, Geopolitical Risk Analyst at RS Energy Group, said.

“Saudi Arabia feels the deal to cut production has been successful and they do not want to lose their results and do not want to lose their momentum just to pursue the policy but to say it will be harmful for them, This has been shown in 2018, ”he said.

Even so, Saudi Arabia is pumping below the OPEC agreement's quota of 500,000 barrels a day, so it can still raise output and still meet the conditions of the OPEC + agreement. This alliance will meet on 25-26 / 06/2019 to discuss whether to extend the agreement.
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High Tech Brain: What will the oil market be like after the US decides to end Iran's exemption period?
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