Iran’s Unrest and the Oil Markets
Anwar Altaqi – Esam Aziz
Instead of looking in the mirror, the Iranian regime blames everyone else for its problems — from international imperialism, to the Zionist conspiracy, to agents of America, to Trump, to Emmanuel Macron, to Theresa May, and even Saddam Hussein. The regime’s security forces have killed tens, and possibly hundreds of protesters, yet the government may be unable to quell its population as it had in previous popular revolts.
What impact, if any, will this situation have on the oil market? The protests spreading across Iran pose no immediate threat to the nation’s oil exports, but the unrest could cause the Trump administration to take an even tougher stance against Iran, increasing the odds of a major supply disruption.
To disrupt those supplies, the protests would have to spark strikes in the nation’s oil fields, and there is so far no indication that this will occur. We do not expect it to happen in any short-term forecast, at the least. The Iranian regime has a vast security apparatus loyal to Supreme Leader Ayatollah Ali Khamenei that is more than capable of suppressing the current demonstrations if the protests increase in intensity and expand.
President Trump may want to impose serious sanctions. Nonetheless, some traders were bidding up the price of oil during the first week of the riots. US West Texas Intermediate (WTI) hit its highest level since mid-2015 in early trading during that week. It soon slipped back throughout the session but then spiked, this time to a fresh two-and-a-half year high. Prices soon returned to their normal track, indicating that the psychological impact of the riots had passed and the market saw that actual supplies were not affected.
Before some of the nuclear sanctions were lifted in 2016, the embargo had reduced Iranian exports by about one million barrels a day. But the impact of sanctions would not be as great this time around. President Trump would struggle to persuade European partners to the nuclear deal to go along with sanctions. Still, Richard Nephew, an expert on sanctions at Columbia University’s Center for Global Energy Policy says that US measures, if taken, could remove 300,000-400,000 barrels per day of Iranian oil from the market. For now, the Trump administration is not taking this step. Tehran has already hinted, again, that if the United States “fails to honor its commitments” in the nuclear deal it may also stop its cooperation with the International Energy Agency (IEA), hence preventing inspectors from accessing any of its nuclear sites.
The impact of Trump’s announcement that he will settle this time with imposing sanctions on Iranian persons and entities, instead of imposing sanctions on the country itself, would help the market avoid any artificial increase in prices. If new sanctions were to be imposed, the expected 400,000 barrels withdrawn from supplies will cause an abrupt increase in prices, but in fact prices could be compensated quickly. Today, such volatility in the oil markets is not welcome, even by oil exporters.
The IEA predicted in December that total supply growth in 2018 could exceed demand growth. Experts say that rising non-OPEC supply growth is already set to push the market back into surplus during the second and third quarters of the year. Current price levels will only fuel further production growth. The IEA also believes that up to 300,000 barrels per day (b/d) of demand could be cut from forecasts at current prices.
Furthermore, a sustained WTI price above $60 a barrel will continue to support both hedging of future production and a strong drilling response. The US rig count is somewhat stalled, but only after rising for three weeks. Productivity from new rigs continues to rise, encouraged by higher prices. The exact fruits of recent activity will be visible once the first quarter closes.
Even if the United States decides to pull out of the “Joint Comprehensive Plan of Action” that was drawn up between Iran and the the five permanent members of the United Nations Security Council and Germany in 2015, an abrupt move in prices is not expected, at least as long as the current geostrategic situation is sustained globally. Such a decision, if it ever happens, may result in a $5 per barrel rise in crude oil prices. Some OPEC producers may be willing to fill the gap in supplies, despite their production cut policy.
It all depends on the foundations of the current rally in oil prices. While we prefer to wait for further empirical data related to the market’s fundamentals, some experts believe that the ground under the current rally is not strong enough to sustain any prediction of a sustainable increase in prices.
Barclay’s analysts, led by Michael Cohen, said in a January 5th research note that the risk to oil prices is “skewed to the downside from here as fundamentals on the horizon suggest a reversal is in order.” The prediction goes on to add that while the recent oil price rally was bolstered by some unexpected events, the forces that will spark a reversal are more predictable, and that rising US oil production will lead to another surplus of inventories in 2018.