Oil hits $80, highest since Nov 2014, on Iran concerns

Roman Schwartz
May 17, 2018

As a supply loss in collapsing Venezuela and a potential decline in Iranian oil exports push oil prices up, the pace of demand growth in China could drive global demand growth higher. Analysts estimate anywhere from 200,000 to 1 million bpd could be cut from global exports next year.

Despite these downward forces, the market retains support from OPEC and other producers' production cuts and US sanctions on Iran. Oil has risen 51 per cent in the a year ago, driven by coordinated supply cuts and, this month, by concern over Iranian supply after the United States said it would reimpose sanctions on Tehran over its nuclear activities.

Brent crude has hit $80 per barrel for the first time since November 2014. However, capital expenditures (capex) rose by only 2% year/year (y/y), and were down by about 42% from 2014 levels.

OPEC figures published on Monday showed oil inventories in OECD industrialized nations in March fell to 9 million barrels above the five-year average, from 340 million barrels above the average in January 2017.

United States crude exports jumped by 689,000 b/d last week to 2.566 million b/d, a record high, leading to a draw in crude stocks, Energy Information Administration data showed Wednesday. This domestic production increase will have a significant moderating influence on future oil prices. The feedback/reflexivity here (that results from a price maker/entity with market power using spreads/inventory as a proxy for supply-demand balance, and market participants forming expectations about how the price maker will behave) greatly complicates things. There is one big difference now, of course-shale's massive growth. China's crude oil imports in the first quarter increased by 7 percent on the year to around 9.09 million bpd-a rise of nearly 595,000 bpd on average compared to Q1 2017, according to Reuters calculations.

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"Barring a move by the OPEC/non-OPEC coalition, it is hard to argue how prices could weaken on a sustained basis, with price action in fact still pointing to more gains to come".

"Crude oil prices have risen by almost 75 [percent] since June 2017".

So while $80 might be Saudi Arabia's purported magic number, its spell might prove short-lived. It's important to remember how and why the market got to its current situation. On May 8th Donald Trump announced that America would withdraw from its nuclear deal with Iran and impose new sanctions on the country.

Shortly after the United States announcement, Saudi Arabia acknowledged the need to work with producers and consumers to mitigate possible supply shortfalls. Other OPEC officials, meanwhile, have expressed complacency.

A surge to triple digits is not guaranteed, of course. Saudi Arabia has been condemning that Iran used economic gains from the lifting of sanctions to continue its activities to destabilize the region, particularly by developing ballistic missiles and supporting terrorist groups in the region. It will take up to 180 days to allow Iranian oil customers and other companies involved in doing business with Tehran to make plans.

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