The oil market is going to go through a very volatile period in the next few weeks, and perhaps months.
With the rest of US president Donald Trump’s sanctions against Iran having gone live this week on Monday November 5, the oil market is put into a very precarious position.
Yet Trump isn’t the only catalyst here, even if he is a major one, as he claimed yesterday during a White House press conference that he alone was the reason behind prices dropping, and not reaching $100 or $150 levels.
Factors in play
The entire global economy has been in an unsettling state as of late. With the Saudi consulate controversy on everyone’s mind, and a US-China trade war ongoing, things are not looking pretty.
All in all, the whole situation is a melting pot of potentially bad things waiting to happen. Will Saudi boost crude production to make up for the loss of Iranian supplies? Will Trump tighten the sanctions further? How will the international community respond to fluctuating oil prices? A lot of questions are popping up at this point in time, and many of them could have grim answers.
Can oil prices make a recovery, realistically?
Brent crude exhibited an approximate $10 month-on-month drop at the start of November, in anticipation of US sanctions against Iran. Its value hit $71.18 on Tuesday, its lowest since August 16. Brent reached a four-year high of $86 per barrel in early October, according to CNBC, but eventually succumbed to sanction fears. WTI values mirrored the Brent crude drop, also dropping roughly $10.
Yet, it’s not all bad news. Currently, a Brent crude barrel is pricing at over $72.
This came as a result of a report that said that Russia and Saudi Arabia are discussing oil output cuts in 2019. According to CNBC, “Russia’s TASS news agency, citing an unnamed source, reported that the two countries have started bilateral discussions over possible 2019 oil production cuts.
A Joint Opec/non-Opec Ministerial Monitoring Committee meeting in Abu Dhabi this coming weekend could discuss this.
Should major producers such as Saudi and Russia cut back on their contributions to global supplies, sellers will likely be emboldened to raise their prices. Iran already lost around 1 million bpd in export output following the sanctions, from 2.5 million bpd down to 1.5 million bpd.
According to the US State Department, companies in more than 20 nations have entirely stopped buying Iranian crude in fear of US scrutiny, depriving Iran of roughly $2.5 billion in revenue, CNBC reports.
The US has issued waivers to countries like India, South Korea and China to continue trading with Iran, in an effort to keep the market stable.
“I don’t want to drive the oil prices in the world up, so I’m not looking to be a great hero and bring it down to zero immediately,” Trump told reporters on Nov. 5 before flying to a campaign event, Reuters revealed. “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 oil prices.”
Who can come to the rescue?
To make up for the upcoming loss in supply, crude oil producers have been boosting production. OPEC crude production rose in October to the highest since 2016, while Russia was said to raise output to a post-Soviet record, according to Bloomberg. The U.S. surpassed Russia in August, with the largest year-on-year supply increase in U.S. history.
Can this surge in production be sustained, however?
The first country that comes to mind in filling the Iranian gap is Saudi, which boasts up to 2 million bpd in reserve output.
Other producers, such as Libya, Venezuela and Nigeria, are not in the best position to lend a helping hand. Libya continues to suffer from political instability, whereas Venezuela is going through its worst-ever economic crisis, and oil production disruptions due to compromised infrastructure. In Nigeria, security remains a major issue, with illegal business practices surrounding their oil industry.
The US is nearing production levels at 11 million bpd, thanks to rejuvenated shale production at current oil prices.
“While OPEC and Russia may use cuts to (at least) support $70/b, the US administration could potentially use some flexibility on its waivers to prevent the price from breaking above $80/b,” Saxxon Bank said.