As US policy is now aimed at stopping oil outflows from Iran to Asia and the world, new fears arise.
No, not supply shortages as several players, including Saudi and Russia, could stand ready to fill the gap and spare capacity from other suppliers is also at standby.
Supply disruption and potential oil wars with deep and substantial geopolitical ramifications.
The zero export US target
Washington announced all Iran sanction waivers would end by May 1, 2019, sending a signal to all importers to stop buying from Tehran, or face sanctions, ending 6 months of waivers, Reuters reports.
At its peak, Iran was the No.4 OEPC producer at 3 million barrels per day (bpd).
Ellen Wald, a non-resident senior fellow at the Global Energy Center of the Atlantic Council, told Reuters the US “seems to expect” Saudi Arabia and the United Arab Emirates to replace the Iranian oil, but she added, “that this is not necessarily the way Saudi Arabia sees it”.
The White House said Monday it had agreed with oil-producing allies such as Saudi and the UAE "to take timely action to assure that global demand is met as all Iranian oil is removed from the market.”
Filling the supply gap
OPEC will meet in June in Vienna to discuss future output outlooks, and Saudi is its largest producer, currently abiding by an OPEC deal to pump 9.8m bpd, but with an ability to easily go back to 10.5 million bpd, second moist after the US 11-12 million bpd.
Analysts at Bernstein Energy said today that “higher oil prices will incentivize U.S. production” to rise, after already hitting a record of over 12 million bpd this year.
Oilprice.com said U.S. shale production will rise by 80,000 bpd in May, quoting the EIA’s latest Drilling Productivity Report.
Russia’s finance minister Anton Siluanov suggested that Russia and OPEC could fight for market share with U.S. shale, a move that would likely crash prices.
In 2018 the U.S exported 2 mbpd of oil, up from 1.2 mbpd in 2017, according to the EIA.
Oil prices surge
Brent crude stand at $74.6, the highest level since November 2018 and West Texas Intermediate (WTI) crude is at $66.10, both at time of publishing and both rising.
“While some market participants were expecting the waivers to end when they expire in early May, this was still not fully priced in,” said Hussein Sayed, Chief Market Strategist at FXTM.
“Whether Oil prices will resume their uptrend from here on depends on OPEC’s next move, especially given the deteriorating situations in Libya and Venezuela. We expect to see increasing pressure from Trump’s administration on OPEC to pump more Oil, and that’s likely to lead OPEC+ to increase output in the second half of the year.”
According to The Hill, Iran is responding by threatening to close the Strait of Hormuz, which would affect the transport of oil, quoting the semi-official Tasnim news agency.
The agency quoted Gen. Alireza Tangsiri, the head of the Iranian Revolutionary Guard saying, “If we are banned from using it, we will close it."
M&As in oil becoming a trend
Besides the oil price fight, the industry is consolidating.
Saudi Aramco is in “serious discussions” to acquire by next June up to a 25% stake in Reliance Industries’ refining and petrochemicals businesses, the Times of India the Economic Times” and the “Bloomberg Quinn reported.
A minority stake sale could fetch around $10 billion to $15 billion, valuing the Indian company's refining and petrochemicals businesses at around $55 billion to $60 billion.
In February this year, Saudi Arabia’s Crown Prince Mohammed bin Salman’s visited Delhi and projected investment opportunities in the $100 billion range in India over the next two years.
Chevron announced a decision to buy Anadarko Petroleum for $33 billion, a move that could spark a wave of consolidation in the shale industry, but also set off a round of M&A activity as bigger oil companies swallow up smaller ones, and the industry, as a whole, shifts towards large-scale development, reported OilPrice.com.