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Iran Sanctions and Oil Prices: Who Will Feel the Pain?

November 5, 2018 World 3 Views HOUSTON – The world's oil producers and their customers entered a new period of…

HOUSTON – The world’s oil producers and their customers entered a new period of uncertainty on Monday when renewed US economic sanctions against Iran came into force.

After withdrawing from the seven-national agreement he negotiated under his predecessor to fight Iran’s nuclear weapons efforts, President Trump aims to push Iran to restrict its political and military activities throughout the Middle East. And the administration is committed to its policy will cause pain in Tehran without causing an oil price increase or an aggressive response.

It’s a gig that can eventually cost US consumers at the gas pump. But the initial effect has been relatively benign. Oil prices have fallen in recent weeks, even with sanctions on the horizon.

What are the sanctions?

The sanctions are aimed not only at Iranian oil exports but also by international shipping companies, banks, insurance companies and port operators who do business with Iran. US trade with Iran is already closely controlled, but administration threatens to exclude international companies from the US financial system if they trade, fund or otherwise earn interest in Iranian oil exports.

Businesses are actually given the choice to do business with Iran or with the United States, which has a much larger economy and a more lucrative market.

“The new sanctions will provide an unambiguous message to Tehran: Change your ways or draw the consequences,” wrote Energy Secretary Rick Perry in a commentary in The Wall Street Journal.

The Trump Administration has exempted eight countries, including such large buyers of Iranian crude oil as China, India and Japan, allowing them to continue imports. US officials say that the exemptions are temporary and conditional on a steady decline in imports.

How has the market reacted?

The oil market has been surprisingly elastic and prices were a little lower on Monday. Many energy experts had expected oil prices as they did when the Obama administration led an international sanction effort in 2011 and 2012 to force Tehran into the nuclear bargaining table and pushed oil over $ 100 a barrel. This time, the international price is about $ 73 a barrel – West Texas mid level, the US benchmark, is about $ 10 cheaper – after falling over $ 10 over the past month.

The modest answer is all the more remarkable, given that Iranian oil exports have fallen to about 1.3 million barrels a day, from 2.4 million last spring, as customers have sought other suppliers pending sanctions. Matt Badiali A senior analyst at Banyan Hill, a financial research and publishing company, predicts that sanctions will shave off another 900,000 barrels in the next year.

Everyone said the sanctions would cut roughly 2 percent of global oil supply.

Oil traders have been calmed by the government’s exemption, which signals a more gradual approach that allows European and Asian customers to find suppliers to replace Iranian commodity.

Future prospects for a sharpened oil market sent prices higher earlier this year, encouraging producers to pump more oil. As a result, the lost Iranian fats have been replaced by oil from the United States, Russia and Saudi Arabia. The United States and Russia have both reached output of 11.3 million barrels a day, while the members of the organization of the petroleum exporting countries have increased production to the highest level in two years, despite the decline in Venezuela and Iran.

As more oil pipelines and export terminals are built in Texas and along the Gulf of Mexico, US exports can increase significantly. At the same time, demand for oil has decreased in China and around the world as these economies slow down. Both developments are to limit prices.

What affects consumers?

So far, drivers have saved a lot of pain.

National average price for one gallon of ordinary gasoline on Monday was 2.76 USD, according to the AAA car club, 5 cents less than a week ago and 15 cents lower than a month ago. However, the average is 24 cents higher than a year ago.

However, some experts believe that oil supply may be harder over time, especially during the driving season next summer, which pushes prices higher.

More expensive oil also means higher jet fuel prices, which are often passed on to the traveler public. They can also mean higher prices for plastic – and for natural gas that can affect electricity prices.

What are the prospects?

Much will depend on how Iran is responding to sanctions and how successful it is to smuggle oil through Kurdistan and Turkey. If Iran threatens to block Hormus Strait, an important passage for the Gulf of Persia, prices would probably jump. Any military features or cyber attacks against Saudi Arabia or Israel may have a similar effect. An escalation of hostilities in Yemen, where Iran supports a military force in a proxy war with Saudi people, could threaten other oil conference points.

Some oil detectors say that the world’s supply is large enough for the sanctions to drive prices higher.

“I think there will be no impact on the oil price attributable to sanctions against Iran,” said Sadad Ibrahim al-Husseini a former vice president of Saudi Arabia “due to an abundance of new deliveries made available in OPEC and Russia, as well as incremental production of Brazilian oil production and shale oil that can meet all oil claims in the next few years. “

Barclay analysts expect Brent crude oil, the global benchmark, to sell next year an average of $ 72 a barrel, close to the current level. But some western experts predict a much higher price.

“The market is overestimating the amount of oil that can occur,” said Mr. Badiali from Banyan Hill. “Can the world produce another 500,000 barrels a day? I do not see it.”

And Badr H. Jafar President of Crescent Petroleum, a company in the United Arab Emirates, said that Saudi Arabia might not be able to maintain its high production. “With continued production problems in Nigeria, Venezuela, Angola and Libya, along with Iranian constraint, we could see that prices rose again at 80 dollars,” he said.

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