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The end of the lifting of Iranian sanctions by the Trump administration has put oil traders on the edge.
While most analysts are optimistic about the capacity of OPEC leader, Saudi Arabia, to fill the void left by the decline in Iranian oil exports, the reality could be totally different. Looking at the ongoing discussions between the two key OPEC members, Saudi Arabia and the United Arab Emirates, there seems to be no indication that the Petroleum Kingdom will be willing to increase its overall oil production to keep prices low at pump in oil importing countries.
The real knot right now is what the market will do when, the 2North Dakota May, the renouncements to the Iranian sanction come to an end. History has shown that oil importers are very well equipped to take mitigation measures to counteract the effects of sanctions imposed by Iran. Saudi Arabia and others will have to be very careful to stabilize the market without falling into a Trumpian trap, which could lead to oversupply in the short term.
At the moment, everything indicates that oil prices are rising. If no additional amount of oil is actually put on the market, the shortages will become visible within a few months. Statements made by US President Trump and US Secretary of State Mike Pompeo that Saudi Arabia and the United Arab Emirates will increase their stocks to counter the loss of Iranian volumes are only wishful thinking and not based on any firm promise from Riyadh or Abu Dhabi.
OPEC leaders are well positioned to respond to Trump's requests for additional volumes and lower prices. Washington's strategy may well have turned against the situation because the American shale will not be able to provide the markets with the necessary crude qualities. At the same time, national oil companies are willing to step back as OPEC + production cuts are in place. Related: Strong increase in the number of drilling rig pressures
For Saudi Arabia, additional production increases are not necessary. Current prices and production levels are sufficient to support ongoing economic diversification plans, stabilizing the position of Crown Prince Mohammed bin Salman. The stability of the oil market has also generated sufficient confidence in the market for NOCs like Aramco to enter the international bond market by force. Low-cost financing is an attractive tool for Saudi Arabia and the United Arab Emirates to boost their economy in the short term.
Western analysts continue to tackle the loss of Iranian volumes given OPEC's spare production capacity. However, this is not a major concern as the market is sufficiently supplied for the next few months. There is no real need to force Saudi Arabia and the United Arab Emirates to open their taps to flood the market. Current crude oil prices are also not at levels that are actually undermining global economic growth. Saudi Arabia and the United Arab Emirates could easily add about 1.5 to 2 million bpd in the market, but if one relies on the irrational emotional behavior of the oil market, an increase in production Saudi could lead to a fall in prices or worse. The agreement cut with OPEC + must be revised in June 2019 and no changes should be expected before that date.
Another major problem is already affecting the market. Oil-importing countries, such as China or India, will in the coming weeks negotiate new oil contracts with Iran. These volumes could partly destabilize the market if other OPEC producers fall into the trap of increased production to force Iran out of the market. The most sensible approach would be to further tighten the market, which would draw attention to the still high level of global storage, but without creating a shortage.
The situation of the Iranian sanctions will not change the current position of Riyadh. The only unknowns at present are the impact of Libyan and Venezuelan supply cuts. A potential loss of Libyan crude volumes could change OPEC's overall strategy in the near term. The decline in Venezuelan production has already been taken into account by most parties.
Riyadh will also review the developments in Russia. Although Russia is part of the OPEC + agreement, there seems to be some reluctance to continue cutting production in Moscow. Russia and Saudi Arabia will have to consider their approach, as American shale production could skyrocket when prices rise too much. Moscow and Riyadh will face an increasingly tense market, especially during the US driving season, while trying to keep prices under control.
Related: Reuters: OPEC oil production drops to the lowest since 2015
In any case, restricted markets are much more important for OPEC + than a successful Trump administration. Prices between 70 and 80 dollars a barrel will not reduce economic growth dramatically, while the coffers of OPEC members will be filled. Trump 's tweets like the one on Friday will probably fall in the ear of a deaf person.
OPEC may also, without formally terminating the production cut agreement, provide additional volumes to the market to keep prices within limits. Saudi Arabia, for example, could increase production by another 500,000 bpd without exceeding its OPEC quota. If OPEC members and Russia are able to limit their own eagerness to conquer Iran's market share, the market will remain stable longer. No news should be announced before the June meeting in Vienna, not even at the 19 May OPEC + ministerial monitoring meeting.th. Trump will soon have to find a way to explain to his constituents why he can not control the price of gas.
By Cyril Widdershoven for Oilprice.com
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