How will the Iran deal collapse impact crude prices

Brenda Watkins
May 16, 2018

The difference between the two benchmarks briefly widened to more than $8 a barrel, the widest gap since April 2015, reflecting surging US crude supplies and a greater geopolitical risk to Brent-based crudes.

U.S. West Texas Intermediate (WTI) crude futures were at $71.08 a barrel, down 23 cents, or 0.3 percent, from their last settlement.

China, which is the world's biggest importer of oil, saw refinery runs rise 12 per cent in April compared to the same time a year ago to about 12m barrels of oil per day.

With renewed USA sanctions looming against OPEC-member Iran and oil demand strong, analysts said crude markets will likely remain tight for much of the year.

"You have the threat that a high enough price will start to activate the 7,700 drilled but uncompleted wells in the Lower 48 states", said Walter Zimmerman, chief technical analyst at ICAP TA.

The IEA said there was now the risk of a potential double supply shortfall represented by Iran and Venezuela, where the pace of oil output decline is accelerating due to an economic crisis, that "could present a major challenge for producers to fend off sharp price rises and fill the gap, not just in terms of the number of barrels but also in terms of oil quality".

Source U.S. Energy Information Administration Short Term Energy Outlook May 2018
Source U.S. Energy Information Administration Short Term Energy Outlook May 2018

The Paris-based IEA cut its forecast for global demand growth to 1.4 million barrels per day for 2018, from a previous estimate of 1.5 million bpd. The coming USA sanctions pushed up oil prices last week after President Donald Trump withdrew the United States from the nuclear deal.

The tightening market has all but eliminated a global supply overhang that depressed crude prices between late 2014 and early 2017. If demand growth continues to be strong-as now expected-an already tight oil market could become even tighter amid geopolitical concerns, driving oil prices further up.

During the week from April 28 to May 4, the API reported a draw of 1.85 million barrels of crude oil. As the dollar strengthens, investors can retreat from dollar-denominated commodities like oil.

The Secretary-General, Organisation of the Petroleum Exporting Countries (OPEC), Mohammed Barkindo, attributed the rising oil prices to efforts by OPEC and non-OPEC countries to rebalance the market through production freeze. With Japan and South Korea already indicating that they will aim to attain a waiver from the U.S. in order to continue buying Iranian crude, the impact of Trump's actions will rest on how far he goes in comparison with Obama's previous sanctions.

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

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