The end of the Iranian sanction by the Trump Administration has put oil traders on edge.
While most analysts are optimistic about OPEC leader Saudi Arabia being able to fill the gap left by lower Iranian oil exports, reality could be totally different. Looking at the ongoing discussions between OPEC's two key members, Saudi Arabia and the UAE, there are no real signs that the Kingdom of Oil will be willing to increase its overall oil production to keep prices at the pump low in oil importing nations. ] The real crux at present is what the market will do when, on the 2 nd of May, the Iran sanction waivers end. History has shown that oil importers are very well equipped to take measures to counter the effects of the Iran sanctions. Saudi Arabia, and others, will have to be very careful to stabilize the market without falling into a Trumpian trap, which could result in an oversupply situation in the short term.
At present, all signs point to higher oil prices. If the real additional oil is taken into account, shortages will be visible within months. Statements made by U.S. Pat. President Trump and U.S. Secretary of State Mike Pompeo that Saudi Arabia and the UAE will add supplies to counter the loss of Iranian volumes are currently only wishful thinking, and not based on any hard promises from Riyadh or Abu Dhabi.
OPECs to react to Trump's calls for additional volumes and lower prices as they wish. Washington's strategy may well have backfired, as U.S. shale will not be able to supply the markets with the necessary crude grades. At the same time, national oil companies are willing to take a backseat, as long as OPEC + production cuts are in place. Related: Sharp Rise In Rig Count Pressures Oil Prices For Saudi Arabia, additional production is not needed. The current price and production levels are sufficient to support the ongoing economic diversification plans, the position of Crown Prince Mohammed bin Salman. Oil market stability has also generated enough positive sentiment in the market that NOCs like Aramco are able to enter the international bond market by force. Low cost financing is an attractive tool for Saudi Arabia and the UAE to boost their economies in the short run.
Western analysts are still addressing the loss of Iranian volumes in the light of OPEC's spare production capacity. This, however, is not a major concern if the market is well enough supplied for the next months. There is no real necessity to force Saudi Arabia and the UAE to open up their taps to flood the market. Current crude oil prices are also at levels that really erode global economic growth. Saudi Arabia and UAE could easily add around 1
Another major issue is hanging over the market already. Oil importing countries, such as China or India, will use the next couple of weeks to negotiate new oil contracts with Iran. These volumes could partly destabilize the market if other OPEC producers fall into the trap of increasing production to squeeze Iran out of the market. The most sensible approach would be a further tightening of the market resulting in a draw from the still elevated global storage, but without creating a shortage. The only unknowns are the impact of Libyan and Venezuelan supply outages. A potential loss of Libyan crude volumes could change OPEC's overall strategy in the short term. The Venezuelan production decline has already been priced in by most parties.
Riyadh will also be looking at the developments in Russia. Even though Russia is part of the OPEC + agreement, there seems to be some reluctance to sustain output cuts in Moscow. Russia and Saudi Arabia will need to consider their approach as U.S. shale production could be higher when prices rise too much. Moscow and Riyadh will have to deal with an increasingly tight market, especially during U.S. driving season, while trying to keep prices in check.
Related: Reuters: OPEC's Oil Production Drops To Lowest Since 2015
Regardless of this, tight markets are much more important for OPEC + is a happy Trump Administration. Price levels between $ 70-80 per barrel will not fall into economic growth, while the coffers or OPEC members will be filled. Trump's tweets such as the one on Friday will likely fall on deaf ears. Saudi Arabia, for example, could increase production by another 500,000 bpd without going over its OPEC-imposed quota. If OPEC members, and Russia, are able to constrain their own eagerness to take over Iran's market share, the market will be stable for longer. No news should be expected before the June meeting in Vienna, even during the OPEC + ministerial monitoring meeting on May 19 th . Trump will soon need to find a way to explain to his voters why he can't keep gasoline prices in check.