By Arab News
By Cornelia Meyer*
Last week the oil markets were packed with drama. Observers had been waiting with bated breath for a decision on whether or not the Trump administration would roll over the exemptions to the waivers on the sanctions of Iranian oil imports it had granted to eight countries.
Nobody expected the US president to give his decision as early as last Monday. To everybody’s surprise he chose to inform the public that the US would not roll over the exemptions. That sent Brent soaring to above $74.
Donald Trump had accompanied his announcement with comments that markets would remain well-supplied because Saudi Arabia, the UAE, the US and others would ensure that market demands were met.
Saudi Energy Minister Khalid Al-Falih surprised further when he said that the Kingdom would not change its output levels in May but closely watch markets.
The Joint Ministerial Monitoring Committee (JMMC) will meet in May in Jeddah. It monitors the production cuts of OPEC+ (an alliance of OPEC and 10 allied nations lead by Russia). Action on the part of OPEC is unlikely until OPEC+ meet in late June in Vienna.
On Thursday news hit that Germany, Poland and Slovakia halted Russian imports from the main Druzhba pipeline due to quality concerns. While quality issues with pipeline oil can occasionally occur, this could not have come at a worse time given Trump’s announcement earlier in the week.
The oil price quickly pierced $75 just to tumble by 3 percent on Friday on a Trump tweet urging OPEC to open its taps.
The rise and steep fall of the oil price last week showed a few things, but mainly that there is uncertainty in the markets.
On the one hand Trump’s and US Secretary of State Mike Pompeo’s announcement not to extend the waivers came earlier than expected and gave some clarity on the direction of travel the US had intended to take. On the other hand, Saudi Arabia and OPEC did not immediately announce that they stood ready to compensate for the shortfall.
At the same time, the US simultaneous clampdown on Iran and Venezuela takes out the heavy grades that refiners desperately need. While the US has become a net exporter of oil courtesy of the shale revolution, there is only that much of its light crude that refiners can accommodate at this point. India finds itself in a particular bind as its refiners depend heavily on Iranian crude, even more so since Venezuelan production has fallen off a cliff.
Nevertheless, the steep fall of the oil price on Friday was a reflection that OPEC (particularly Saudi Arabia and the UAE) does have the spare capacity to pump an extra 1.5 – 2 million bpd.
Also, if OPEC+ reversed its production cuts of 1.2 million bpd, which it had signed up for in December of last year, this would be sufficient to compensate even if Iranian exports fell to zero. However, no one expects Iranian exports to go to zero. One will have to see whether concessions on imports of Iranian crude will enter the US-China trade negotiations and what side deals China will cut with the Islamic Republic. India’s future course of action is a further factor.
We will need to give it until the end of May to understand how much Iranian oil will de facto come off the markets and until June to see how OPEC+ will react. In the meantime, Venezuelan production will remain extremely low due to the domestic situation.
The political situation in Libya is another wild card. While the current developments have so far not affected output, they could if the conflict reaches the oilfields.
The US policy move will ease tensions in OPEC+, where Russia recently piled on the pressure to relax December’s production cuts. Some of its producers have become anxious to release their new-built capacity on the market. In some counterintuitive way the US stance on the Iran waivers may give the OPEC+ coalition the space to formalize future co-operation under less pressure.
We will have to wait until June’s meetings of OPEC+ to see how the end of the exemptions to the Iran oil sanctions will play out in the market. While markets are getting tight, there is sufficient spare capacity to keep them well-supplied. The safe money is on that markets will remain well-supplied.
- Cornelia Meyer is a business consultant, macro-economist and energy expert. Twitter: @MeyerResources