This is a complimentary research note from our Energy Policy analyst Joe McMonigle. Email sales@hedgeye.com for more information.
Oil prices jumped 3 percent Monday with Brent testing $75 after the US announced it will not extend Iran oil waivers in May attempting to remove another million barrels a day of Iran oil exports from global markets.
Last November the US granted eight countries waivers from US sanctions on Iranian crude purchases for 180 days. Three of the eight countries had already reduced imports to zero but the other five - China, India, Turkey, South Korea and Japan – were hoping to receive another waiver extension.
The waiver decision presents a conflict for two of Trump’s highest priorities: exerting maximum pressure on Iran by cutting oil export revenues and keeping oil prices in check.
The White House statement today tries to resolve that conflict by relying on commitments from Saudi Arabia and the UAE as well as surging US production in “ensuring that global oil markets remain adequately supplied.” The statement continues “we have agreed to take timely action to assure that global demand is met as all Iranian oil is removed from the market.”
The US decision will not only mean maximum pressure on Iran but also maximum pressure on oil markets, especially as we head into the high demand summer season. We believe the market had already priced in at least some waiver renewals so the decision is a surprise that is already resulting in a price spike.
The glass-half-full view for oil markets is there is certainly spare capacity with the Saudis and other Gulf allies, in addition to surging US production. But combined with declines global crude stocks and production in Venezuela as well as possible disruption in Libya, a zero-waivers Iran decision will present a challenge to keeping oil prices in check.
In addition, while it is good news there is spare capacity to deal with Iran shortages, the bad news is once the spare capacity is used we will be back to a market with no cushion to deal with other supply disruptions. So bearish spare capacity now will lead to a bullish scenario of little spare capacity later.
Saudi Arabia is already producing about 500,000 b/d less than it is allowed under the new OPEC production cut agreement so it can quickly add new supplies to the market without breaking a sweat.
However, Saudi Arabia made a cautious statement today about “closely monitoring the oil market developments” following the US decision on zero waivers and said it “will be consulting closely with other producing countries and key oil consuming nations to ensure a well-balanced and stable oil market.” It is hard to fault the Saudis for the wait-and-see approach but the market was likely hoping for a stronger statement on commitments to adding supply.
We think an extension of the OPEC cuts in June is now certainly in question. We could see a scenario similar to last June when OPEC’s Joint Ministerial Monitoring Committee (JMMC) said it would encourage a pull-back in over-compliance to meet demand after Trump initially announced sanctions would be re-imposed last May. But OPEC unity and cooperation will be tested in light of the zero waivers extension decision and the US-highlighted roles of Saudi Arabia and UAE.
OPEC’s Joint Ministerial Monitoring Committee meets on May 19 in Jeddah and the next full OPEC meeting is June 25 in Vienna.
