Oil market weighs OPEC output, Iran sanctions
President Donald Trump has the global oil market speculating whether he will allow last-minute waivers for countries to import Iranian crude, at the same time as oil buyers are waiting to learn whether OPEC and its allies will extend their production cuts past June.
Each of the two decisions could either restrict oil output and drive up prices, or the opposite.
Doing their part to boost supply, U.S. oil producers hit a record 12.3 million barrels per day during the last week of April. Texas, alone, is outproducing every OPEC member except Saudi Arabia.
The collective uncertainty of too much oil, too little or just the right balance is bringing instability to prices at the same time as other events are affecting the market:
• Russia temporarily cut back its oil production by a reported 10 percent after discovering it was shipping tainted crude to domestic and foreign refiners, Reuters reported May 3.
• U.S. crude stockpiles are at their highest level since September 2017, according to the U.S. Energy Information Administration.
Just a couple of weeks ago, the market was expecting that further reductions in Iranian oil exports, along with continued production declines due to civil unrest in Venezuela and Libya would help keep prices on the rise as buyers worried about supply.
Brent, the global benchmark, had climbed from near $51 per barrel on Christmas Day last year to almost $75 on April 22. Alaska North Slope crude followed a similar climb, averaging about $74 the week of April 22.
Alaska crude continues to track the global benchmark, separate from the U.S. pricing point for West Texas Intermediate crude, which traded under $62 per barrel last week. The strong growth in shale oil production is holding down U.S. prices, but a lack of pipeline capacity to move that surplus crude to the West Coast allows Alaska oil to earn a better price.
However, it seems every time oil markets pick up amid fears that supply might not keep up with demand, something happens to steer prices the other way. The market fell by about $4 per barrel last week, sliding to their lowest point in a month, as supply fears eased.
“Oil prices are under pressure,” said Rob Haworth, senior investment strategist at U.S. Bank Wealth Management. “Growing U.S. oil production and the weaker trend to global growth have helped moderate the impact of OPEC production cuts and U.S. sanctions on Iran and Venezuela,” he was quoted in The Wall Street Journal on May 3.
A lot of the market uncertainty is focused on U.S. sanctions against Iran and whether Trump will allow some countries to import Iranian crude despite his decision to halt sanction waivers as of May 2.
“The U.S. is saying they’re going to … take away those waivers again, and the oil price is clearly drifting up because of that,” BP CEO Bob Dudley told CNBC during an interview at the Milken Institute Global Conference in Beverly Hills, California, on April 30.
“I think the key — the wild card key — is will the U.S. at the last minute give some more waivers or not?”
The answer to that question will influence whether oil prices rise or fall, he said.
Trump’s threats last fall to impose tough sanctions on Iran — with no waivers — drove up the price for Brent crude to $85 per barrel in early October. But then prices dropped into the low $50s when he approved waivers in November for Iranian crude buyers.
Now faced again with rising oil prices, the president has called on Saudi Arabia and its OPEC colleagues to boost production to help cover for the loss of Iranian oil in the market.
A big problem for the Saudis, however, is that they need higher oil prices to cover the nation’s spending. Saudi Arabia needs Brent at about $88 per barrel to balance its budget, according to calculations by The Wall Street Journal. The United Arab Emirates needs $72 oil, while Angola and Algeria are at $83 and $84, respectively.
OPEC+, which includes Russia, is scheduled to meet June 25 to 26 to decide whether to continue their self-imposed curbs on output, though Saudi Arabia and other producers reportedly plan to meet May 19 to discuss the question of boosting output to help cover for the loss of Iranian oil in the market.
By playing host for the May 19 technical session, the Saudis “fear Trump will be fixated by the meeting,” The Wall Street Journal quoted a source May 3.
The president said he called OPEC on May 3 and told them to pump more oil to help reduce prices.
“You’ve got to bring them down,” he said.
Earlier in the week, however, Saudi Energy Minister Khalid al-Falih said there is no need to produce more oil, though he added that the country may do so if customers ask for more supplies.
Within days, Bloomberg reported that Asian refiners were asking Saudi Arabia for more crude in June and July to cope with supply disruptions from Iran and Venezuela.
But with OPEC still recovering from last year’s slide to the $50s, some analysts expect the organization to move cautiously.
Complicating the president’s call on OPEC — Saudi Arabia, in particular — to protect the market for any supply loss from U.S. sanctions on Iran is the doubling of American shale oil production in the past five years, threatening OPEC’s dominance in the business.
It’s a tug of war, Gordon Gray, head of oil and gas research at HSBC, was quoted by The Wall Street Journal.
And it’s a war where U.S. producers have a price advantage against the $88 or so that the Saudi government needs to cover its budget.
“The U.S. oil price needed for shale oil to be profitable is around $53 a barrel or above,” said Roy Martin, an analyst at consulting firm Wood Mackenzie.
Larry Persily is a former Alaska journalist, state and federal official who has long tracked oil and gas markets and projects worldwide. He is the incoming Atwood Chair of Journalism at the University of Alaska Anchorage School of Journalism and Public Communication.