When US president Donald Trump withdrew his country from the Joint Comprehensive Plan of Action (JCPOA) on Tuesday, planning to impose key sanctions on Iran, the action triggered two concurrent set of events: A potential nuclear arms race and a tantalizing oil production race for world dominance.
While there are fears that a nuclear escalation between Iran and Saudi could potentially take place, any such actions are incremental, and long- term prospects, giving markets plenty of time to adjust.
Economic sanctions, and oil price bulls’ favorite indicator, regional security crisis, is the near-term focus for investors, markets and nations.
So much as stake
Dubai was victimized by the decision. Dubai’s billion dollar trade with Iran, as exports to Iran are worth about 5% of its GDP was at risk according to Reuters, and the stock exchange lost 2% following the news.
Bloomberg said India, China, Turkey, and Egypt are among those importing and paying more for oil and whose current account balance will be more vulnerable to rising U.S. interest rates.
Saudi backed Trump’s decision.
Asked what his country will do if Iran restarts its nuclear program, Adel Al-Jubeir told CNN’s Wolf Blitzer that “we will do whatever it takes to protect our people. We have made it very clear that if Iran acquires a nuclear capability we will do everything we can to do the same.”
But the interest lied elsewhere.
As soon as oil prices rose after Trump’s announcement, Saudi said it was ready to offset any supply shortage, Reuters reported an OPEC source familiar with the kingdom’s oil thinking telling it.
Saudi stands to win as a result of sanctions on Iran oil production as prices will increase and the country has a net oil production that’s almost 21% of its GDP as of 2016, according to Bloomberg.
Saudi’s current production is at 10.2 million bpd, with exports of around 7 million bpd.
Iran exported more than 2.6 million bpd in April, the third-largest crude exporter in OPEC, said Bloomberg, adding sanctions could impact about 1/8 of total exports, quoting analysts telling it.
Previous sanctions limited production to 1 million bpd for exports.
Iran produces 4% of global oil supplies.
Oil prices rising
Oil prices have risen 14% this year, half of this increase reflects stronger global demand, a Bloomberg Economics model suggests.
“The rest is likely due to heightened tensions with Iran and other supply shocks and the return of U.S. sanctions could crimp Iranian oil exports,” said Bloomberg.
Brent crude futures rose 27 cents to $77.48 a barrel Thursday, having gained 3.5% so far this week, Reuters reported.
U.S. West Texas Intermediate (WTI) crude futures were up 45 cents at $71.6.
Real US aims? Oil supremacy
Lukman Otunuga, Research Analyst at FXTM told AMEinfo that global crude oil prices extended gains on Thursday and oil bulls received further inspiration from heightened geopolitical tensions in the Middle East which fueled concerns of potential supply disruptions.
“While oil prices have scope to venture higher in the near term on geopolitics, robust production from US Shale has the ability to limit gains down the road,” Otunaga said.
“The combination of OPEC optimism and simmering geopolitical tensions surrounding the Middle East could elevate WTI towards $72.00 in the near term.
CNBC said overall oil production in the U.S. reached a record 10.7 million barrels a day last week, according to the Energy Information Administration.
The EIA on Tuesday raised its forecast for U.S. output in its monthly report to 12 million bpd late next year.
This would make the United States the world’s largest producer, ahead of both Russia and Saudi Arabia.