..Experts See Action As Having Low Impact
Yemisi Izuora
Oil prices inched lower on Wednesday on signs that global markets remain adequately supplied despite a jump to 2019 highs this week on Washington’s push for tighter sanctions against Iran.
Brent crude futures were at $74.24 per barrel down 27 cents, or 0.4 per cent from their last close, while the U.S. West Texas Intermediate (WTI) crude futures were at $66.02 per barrel, down 28 cents, or 0.4 per cent from their previous settlement.
Crude futures rose to 2019 highs earlier in the week after the United States said on Monday it would end all exemptions for sanctions against Iran, demanding countries halt oil imports from Tehran from May or face punitive action from Washington.
U.S. sanctions against oil exporter Iran were introduced in November 2018, but Washington allowed its largest buyers limited imports of crude for another half-year as an adjustment period.
With Iranian oil exports likely declining sharply from May as most countries bow to U.S. pressure, global crude markets are expected to tighten in the short-run, Goldman Sachs and Barclays bank said this week.
Despite this, analysts said global oil markets remained adequately supplied thanks to ample spare capacity from the Middle East dominated Organisation of the Petroleum Exporting Countries (OPEC), Russian and also the United States.
The International Energy Agency (IEA), a watchdog for oil consuming countries, said in a statement on Tuesday that markets are “adequately supplied” and that “global spare production capacity remains at comfortable levels.”
The biggest source of new oil supply comes from the United States, where crude oil production has already risen by more than 2 million barrels per day (bpd) since early 2018 to a record of more than 12 million bpd early this year, making America the world’s biggest oil producer ahead of Russia and Saudi Arabia.
“Total oil supplies from the United States are expected to grow by 1.6 million bpd this year,” the IEA said.
Commercial inventories in the United States are also high.
U.S. crude oil inventories rose by 6.9 million barrels in the week to April 19 to 459.6 million, data from industry group the American Petroleum Institute showed on Tuesday.
Reacting to the issue, Goldman Sachs said the United States’ decision to end waivers from sanctions on imports of Iranian oil may have a limited impact on prices, even though the timing of the halt is much more sudden than expected.
“While we acknowledge the near-term upside price risks, we reiterate our fundamentally derived Brent price trading range of $70-75 per barrel for the second quarter of 2019,” the bank wrote in a note on Monday.
The United States on Monday demanded that buyers of Iranian oil stop purchases by May 1 or face sanctions, a move to choke off Tehran’s oil revenues. In response, crude prices rose to six-month highs on fears of a potential supply crunch.
The bank still expects declining prices into 2020 due to better supplied markets next year and high uncertainties around whether the Organziation of the Petroleum Exporting Countries, OPEC, and fellow producers will continue to abide by their agreement to curb output to support prices after June.
The U.S. investment bank sees Iranian production declining by 900,000 barrels per day (bpd) compared to the immediately available global spare capacity of 2 million bpd, which is set to grow further later this year.
The U.S. policy announcement should support Middle East Dubai crude prices relative to Brent prices given the quality mismatch between the lost Iran volumes and the lighter compensating crudes from Saudi Arabia and the United Arab Emirates, it added.
Similarly, Japan expects a limited impact from the U.S. decision not to renew waivers previously granted on Iran oil import sanctions, the country’s trade and industry minister said on Tuesday.
The United States on Monday demanded all buyers of Iranian oil stop purchases by May 1 or face sanctions, a move to choke off Tehran’s oil revenues that sent benchmark crude prices to six-month highs. Japan is among a group of countries that were previously granted sanctions waivers.
Speaking at a regular press conference, Japan’s Minister of Economy, Trade and Industry (METI) Hiroshige Seko told reporters the government did not see any need to tap national oil reserves following the U.S. decision.
Japan, the world’s fourth-biggest oil consumer, has been reducing its reliance on Iranian crude supplies. Iran now accounts for about 3 per cent of purchases, Seko said.
“We will closely watch international oil markets and exchange views with Japanese companies involved in crude imports and may consider taking necessary measures,” he said, declining to give details.
The United States reimposed sanctions on exports of Iranian oil last November following U.S. President Donald Trump’s move to unilaterally pull out of a 2015 accord between Iran and six world powers to curb Tehran’s nuclear programme.
Eight economies, including China and India as well as Japan, were granted waivers for six months, and several had expected those exemptions to be renewed.
Japanese refineries earlier put a halt on imports of Iranian oil after buying 15.3 million barrels between January and March ahead of the expiry of their sanctions waiver, according to industry sources and data on Refinitiv Eikon.
The White House said it was working with top oil exporters Saudi Arabia and the United Arab Emirates, UAE, to ensure the market was “adequately supplied”.
Sultan Ahmed al-Jaber, the CEO of the Abu Dhabi National Oil Co (ADNOC) of the UAE is in Tokyo for talks with Seko, METI said. The visit was planned before the U.S. announcement, an official in the Japanese ministry said.
Khaled al-Fadhel, the Kuwaiti oil minister, is also in Tokyo, the METI official said.
Al-Jaber and al-Fadhel will hold talks with Seko separately later on Tuesday but there are no plans to discuss alternative supplies to Iranian crude at the meetings, the official said.
However, Tarun Lakhotia, Associate Director at research firm Kotak Institutional Equities said that global crude oil prices are set to rise amid curtailment of supplies led by the reduction in Iran’s crude exports by around 1 million barrel per day (mbpd) due to US’ latest decision to end sanction waivers and also an ongoing disruption of 1.1 mbpd of Libyan oil output amid local unrest.
However, potential increase in OPEC+ crude supplies may mitigate the impact gradually, although with significantly curtailed global spare capacity.
“We expect global oil markets to tighten further in the near term due to full curtailment of Iran’s oil exports post the US decision to end sanction waivers granted to eight importing countries, once the exemptions period expires on May 2 and the possibility of disruptions in crude supplies from Libya given its escalating unrest,” Lakhotia, said.
He added that Iran’s crude exports of 1 mbpd may get fully curtailed in the coming months, as countries that currently import oil from Iran may not want to risk an imposition of sanctions by the US. Iran’s crude production is likely to fall to 1.8 mbpd, closer to the level of domestic consumption, from peak volumes of 3.8 mbpd in June 2018 and recent production of 2.7 mbpd in first quarter of 2019.
Global oil markets have already tightened in the recent months due to voluntary reduction in supplies by OPEC+ and Canada, and restraints on Venezuelan crude exports by the US. OPEC+ may ease production cuts in the near term, as indicated by the US, to mitigate the loss of Iranian crude. However, it will still reduce the available spare capacity in a tight market.
According to K Ravichandran, Senior Vice President at research and ratings agency ICRA, global oil prices could breach the $80 per barrel mark in the immediate aftermath of the US decision to end waivers. “1 mbpd (Iranian exports) is a sizeable reduction in supplies. While it can be offset by additional supply from OPEC+ it is coming at a time when there are ongoing disruptions in Libya and Nigeria,” he said.
He also said that India may not have to worry about supplies immediately as additional oil imports can be sourced from other nations including Saudi Arabia and Kuwait. “Some Indian companies are already importing oil from the US. It is possible to ramp up those volumes too,” Ravichandran said.
Meanwhile, global oil prices hovered near 2019 peaks in early trading on Tuesday after the US move to abruptly to end waivers by May. Brent crude futures were at $74.33 per barrel up 0.4 per cent from their last close and not far off 2019 highs of $74.52 reached on Monday.
