Ex­port ban on Iran could mean a hot win­ter for oil

Iran Daily - - Domestic Economy - By Julian Lee

Win­ter is com­ing, and the oil mar­ket is start­ing to look pretty tight.

Iran’s oil ex­ports will face US sanc­tions from Novem­ber 4 which may lead to a signi¿cant drop in crude sup­ply.

On pa­per there is enough spare ca­pac­ity among other OPEC pro­duc­ers and Rus­sia to off­set fall­ing Ira­nian sup­ply — but what ex­ists on pa­per and what can be brought into pro­duc­tion in the next month or so are not nec­es­sar­ily the same.

Add in a sea­sonal in­crease in oil use and the po­ten­tial for fur­ther pro­duc­tion short­falls else­where in the world, and sup­ply could start se­ri­ously trail­ing de­mand within weeks. That could be enough to pro­pel oil prices higher.

The spare ca­pac­ity among OPEC mem­bers has al­ready dwin­dled be­low 2 mil­lion bar­rels a day.

Those coun­tries that could do so have lifted out­put in re­sponse to June’s (dis­puted) de­ci­sion to aban­don in­di­vid­ual out­put tar­gets.

In theory Saudi Ara­bia could im­me­di­ately raise out­put to 11.5 mil­lion bar­rels a day — that’s what Crown Prince Mo­hammed bin Sal­man told Bloomberg in April 2016. But it hasn’t ever needed to pro­duce that much, and its abil­ity to do so re­mains untested. Reach­ing that level of would prob­a­bly take sev­eral months and re­quire signi¿cant drilling ac­tiv­ity.

The num­ber of rigs drilling for oil in Saudi Ara­bia has been on the rise since April, but is still only back where it was in the spring of 2017, when the king­dom’s fo­cus was on cut­ting, not boost­ing out­put.

London-based En­ergy As­pects con­sul­tants Am­rita Sen and Michal Mei­dan said on Sept. 10 that even if the king­dom has started the Khu­rais ¿eld ex­pan­sion, which has a ca­pac­ity of 0.3 mil­lion bar­rels a day, it’s prob­a­bly ramp­ing up to that level only slowly.

Af­ter the June meet­ings be­tween OPEC and its friends there was a Àurry of talk about restart­ing pro­duc­tion at the ¿elds in the Neu­tral Zone, shared be­tween Saudi Ara­bia and Kuwait, but there has been lit­tle ac­tiv­ity on the ground. Don’t ex­pect to see any pro­duc­tion from those ¿elds be­fore the ¿rst quar­ter of next year at the ear­li­est.

Else­where, Rus­sia has lifted its out­put by al­most 250,000 bar­rels a day since May. The coun­try has the abil­ity to boost pro­duc­tion by a fur­ther 300,000 bar­rels, Oil Min­is­ter Alexan­der No­vak told Bloomberg in Vladi­vos­tok last week.

But it won’t de­cide whether the world needs that ex­tra oil un­til af­ter meet­ing with its OPEC al­lies later this month in Al­giers.

By then the fourth quar­ter will be al­most upon us, and that is when things could get tight. En­ergy As­pects see the world need­ing 33.5 mil­lion bar­rels a day of OPEC oil by then, in line with the group’s own fore­cast. OPEC is cur­rently sup­ply­ing 32.7 mil­lion bar­rels a day, ac­cord­ing to a Bloomberg sur­vey, and that is with Iraq, Nige­ria and Libya all pro­duc­ing near mul­ti­year highs while their se­cu­rity sit­u­a­tions de­te­ri­o­rate.

If re­cent sup­ply dis­rup­tions in ei­ther African coun­try are re­peated, or the un­rest in Iraq’s sec­ond city spreads to nearby oil¿elds, the short­fall could eas­ily rise above a mil­lion bar­rels a day.

The con­tin­ued slide in Venezue­lan pro­duc­tion looks set to worsen the pic­ture.

Leave aside con­cerns about prospects for de­vel­op­ing economies and the im­pact of Trump’s trade wars that are dark­en­ing the out­look for oil de­mand. While these are le­git­i­mate wor­ries, they won’t man­i­fest them­selves un­til next year.

The more press­ing is­sue is the fact that Iran’s ex­ports is the ma­jor fac­tor. A sup­ply squeeze could be enough to push Brent ¿rmly above $80 a bar­rel for the ¿rst time since Nov. 2014.

This win­ter could turn out to be a hot one in­deed for oil mar­kets.

This ar­ti­cle orig­i­nally ap­peared on bloomberg.com.

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