Crude prices rise despite Saudi pledge
President Donald Trump’s decision to scrap the Iran nuclear deal and reimpose sanctions has sent global buyers of Iranian oil scrambling to line up other sources of supply.
Saudi Arabia, the world’s largest crude oil exporter and leading force in the Organization of the Petroleum Exporting Countries, issued assurance overnight that it would provide some cushion for the loss of Iranian supplies.
“The kingdom will work with major producers and consumers within and outside OPEC to mitigate the effects of any supply shortages,” the staterun Saudi news agency reported, citing a statement issued by an official in the energy ministry.
But oil traders weren’t convinced. Crude oil prices climbed on Wednesday with the benchmark West Texas Intermediate grade up $2.19, or 3.2 percent, to $71.25 a barrel for June delivery.
One reason for skepticism is that over the past two years Saudi Arabia has been working with OPEC and Russia to hold back exports and gradually run down world inventories to bolster prices. Saudi Arabia has also indicated that it wants to let those stockpiles dwindle further.
Even though prices are at the highest levels in nearly four years, they fall short of what Saudi Arabia needs to pay for domestic subsidies and military costs in the Yemeni civil war. The International Monetary Fund said last week that crude prices would need to average nearly $88 a barrel for the kingdom to balance its budget. Iran needs a $68 a barrel average price at current export levels, the IMF said.
In addition, Venezuelan oil exports have been dropping steadily as a result of internal disarray and U.S. sanctions. And global oil demand is rising as economies recover. The International Energy Agency forecasts a 1.5 million barrel a day increase in global oil consumption in 2018.
In addition to barring U.S. dealings with Iran, reimposition of the oil sanctions would restrict foreign companies that do transactions in dollars or that have operations in the United States.
Yet the details have been vague. One possible reason: The number one and three officials in Treasury’s office of foreign asset control left the office in the past two weeks.
The administration said that countries seeking waivers from the sanctions would still need to show “significant reductions” in purchases of Iran oil by November or face U.S. penalties. Under President Barack Obama before the nuclear deal was signed, those reductions were set around 20 percent. But the Trump administration has not defined what “significant” means.