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Trump seen likely to re-impose sanction on Iranian oil exports
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Venezuelan output is the lowest in decades and still falling
The deal OPEC struck in 2016 to clear a global glut by halting a
significant chunk of oil production took almost a year of bargaining and
brinkmanship. By year-end, the group may have lost the same amount of
crude unintentionally.
The
Organization of Petroleum Exporting Countries is already cutting daily
production by much more than its pledged 1.2 million barrels.
Venezuela’s economic crisis is battering its oil industry and pushing
output to the lowest level in decades, with a further decline likely. If
U.S. President Donald Trump also reimposes sanctions on Iran, the
cartel’s unplanned losses could swell to double the targeted cut.
That
would pose a dilemma for Saudi Arabia and Russia, the leaders of the
cuts agreement. Should they let the oil market get even tighter, but run
the risk that higher prices hurt demand or spur an even bigger wave of
American shale-oil? Or should they fill the gap by increasing
production, but in the process unravel their historic agreement
prematurely?
“When we think about the year end, it’s Iran in combination
with Venezuela,” said Helima Croft, head of commodity strategy at RBC
Capital Markets LLC in New York. “We could have a snap-back in U.S.
sanctions on Iran. In Venezuela, it’s a slow bleed -- the losses just
keep adding up.”
Venezuelan Slump
Saudi
Arabia and Russia, for years oil-market rivals, assembled a coalition
of 24 OPEC nations and non-members to eliminate the surplus created by
the U.S. shale boom. The accord has exceeded expectations. Excess
inventories will be gone in two to three months, according to the International Energy Agency, and Brent crude prices are above $70 a barrel, the highest in three years.
The
collapse of Venezuela’s oil industry has aided the wider group’s
efforts. The nation’s daily production of 1.5 million barrels is 560,000
barrels lower than October 2016 -- the starting point specified in the
cuts agreement. That’s more than five times its pledged reduction.
The
Latin American country’s economic crisis shows no sign of abating and
output may slump to 1.1 million barrels a day by the end of the year,
according to consultant Rapidan Energy Group in Washington. The decline
will be even steeper if the U.S. follows through on threats to impose new sanctions after elections scheduled for May, Rapidan said.
Iran Sanctions
The
loss of that much Venezuelan crude would tighten oil markets
significantly more than OPEC and its allies intended. The growing
tensions between the U.S. and Iran could make the supply deficit even
more severe.
Next month, President Trump will review America’s commitment
to an international agreement that restricted Iran’s nuclear activities
in exchange for relief from sanctions. He has been fiercely critical of
the accord and recently fired top officials who were supportive of the
deal, replacing them with more hostile figures.
There’s a 70
percent likelihood that Trump will abandon the pact and reintroduce
sanctions on oil sales, said Mike Wittner, head of oil market research
at Societe Generale SA. That would curb Iran’s exports by about 500,000
barrels a day, he estimates.
Under the terms of the 2016 OPEC
deal, Iran didn’t have to reduce production because it was still
recovering from the last round of international sanctions. So a
half-million-barrel drop in its output, combined with the loss of
900,000 barrels a day of Venezuelan crude beyond its pledged reduction,
would double the group’s intended cut.
High Risk
The
situation in both countries is highly uncertain and the direst
predictions may not be fulfilled. America’s European allies are keen to
preserve the accord with Iran, which could mean the impact of renewed
U.S. restrictions on oil sales would be limited, said Olivier Jakob at
consultants Petromatrix GmbH in Zug, Switzerland. Venezuela’s state oil
company has so far managed to avoid defaulting on its debt, although it shows no sign of having the resources required to reverse the slide in production.
Still,
the likely outcome is that OPEC’s efforts to tighten the market will go
further than intended and “the inventory draw will be more than the
target,” said Ed Morse, head of commodities research at Citigroup Inc.
in New York.
That would give Russia and Saudi Arabia the dilemma
of whether to continue restraining production or restore it. It’s not
clear which they would choose.
Before OPEC and Russia agreed to
extend their cuts last year, Moscow voiced concerns that letting prices
rise too high would only stimulate more production in the U.S.. More
recently however, Energy Minister Alexander Novak echoed Saudi support
for continuing the curbs until the end of 2018 as planned and spoke of
the cooperation lasting indefinitely.
Maintaining
the cuts and allowing a significantly tighter market would align with
Saudi Arabia’s desire for an oil price of about $80 a barrel
to support the valuation of Aramco before an initial public offering.
Yet it may also be inclined to boost output to take market share from
regional antagonist Iran, just as it did in the last round of sanctions
in 2012.
“Saudi Arabia increased its production the last time Iran
was under sanctions,” said Eugen Weinberg, head of commodities research
at Commerzbank AG in Frankfurt. “Is it going to be different this time
around?”
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