Complex Made Simple

The die is cast so now what with oil, importers, OPEC and the GCC?

OIl market players and importers are posturing ahead of MAY 1, 2019 when Iran's sanctions take effect

China is Iran’s largest crude oil customer, with total imports last year of approximately 29.3 million tons or about 585,400 bpd US crude oil inventories rose by 7 million barrels in the week to April 19 to 459.6 million The UAE was reported to be able to increase its production by up to 300 to 500 thousand barrels a day

Can anyone defy the US decision to cut-off oil supplies from Iran? And if so, who will do what and how will the market react?

We refuse, maybe

India and China may defy sanctions, according to OilPrice.com.China, imports approximately 500,000 bpd from Iran is also deep into negotiations on trade issues with the US.

CNBC reports that China is Iran’s largest crude oil customer, with total imports last year of approximately 29.3 million tons or about 585,400 bpd, according to customs data sourced by Reuters. That’s roughly 6% of China’s total oil imports.

New Delhi is the second-largest importer of Iranian oil, after Beijing, but not burdened with trade talks.

Iran is exporting currently about 1.4 million barrels a day (bpd) to just five nations — China, India, Japan, South Korea and Turkey, half the production (2.9 million bpd) before sanctions took effect last year. 

How is the market playing out?  

Goldman Sacks is sticking with projections for Brent oil at $70-$75 2Q forecast despite an upside risk resulting from Iran sanctions, combined with Venezuela disruptions and potential Libyan civil unrest. This is also a period of refiner maintenance where close to 9% of US capacity will go offline, according to Reuters. Brent crude futures dropped to $74 per barrel, lower by 38 cents, or 0.5% from their last close, while WTI crude futures were at $65.93 per barrel, down 37 cents, or 0.6%.

At the same time, US crude oil inventories rose by 7 million barrels in the week to April 19 to 459.6 million, data from the American Petroleum Institute showed on Tuesday. The net build is now 11.30 million barrels for the 17-week reporting period so far this year, using API data.

Role of Saudi and UAE 

US sanctions is putting a lot of pressure on Saudi and GCC neighbours.

“The Saudis are sitting on about a million barrels of spare capacity, but they do not want to tank this market,” Helima Croft head of global commodity strategy at RBC told CNBC

Saudi aims for an oil price target for Brent crude between $60 and $80 which means that currents oil values are ok without any need to intervene and pump. Saudi Arabia could hold out for longer than Trump wants it to as it waits for Brent, which is currently around $74 a barrel, to hit $80.

As per OPEC figures, the oil and gas sector generates around 50% of Saudi Arabia’s GDP and accounts for some 70% of its export earnings.

“We think they’ll put probably an additional 400,000 barrels on the market [and] go up to what their OPEC quota is, but I think they’re going to adopt a wait-and-see approach,” Croft says.

According to Bloomberg, Saudi Energy Minister Khalid Al-Falih signalled a wait-and-see approach on Monday.

"In the next few weeks, the kingdom will be consulting closely with other producing countries and key oil consuming nations to ensure a well-balanced and stable oil market," Al-Falih said.

Saudi has an assigned OPEC quota of 10.311 million barrels a day.

The UAE was reported to be able to increase its production by up to 300 to 500 thousand barrels a day.

Saudi Arabia, the UAE and Kuwait have a collective spare capacity of more than 2 million barrels per day.

Gulf News reported that Saudi and the UAE are ramping up their investments in the energy sector to increase production to meet global oil demand. The UAE is targeting a production of 4 million barrels per day by the end of 2020 and 5 million barrels per day by 2030.

OPEC meet in Vienna on June 25 to reconfigure its production targets.