Why oil prices dropped with Iran sanctions

Why oil prices dropped with Iran sanctions
ID : N-3545 Date : 2018/11/27 - 13:50

(Persia Digest) - Former Director of International Affairs at the National Iranian Oil Company (NIOC), believes: “The possibility of an increase of more than two million barrels of non-OPEC countries’ oil in 2019 and a supply surplus on the market has led to a drop in world oil prices in recent weeks.”

With the reimposition of US sanctions on Iran and plans to reduce its exports to zero, prices were expected to spike. But, to the contrary, oil prices have had a gradual drop.

Former Iranian representative in OPEC and former Director of International Affairs at NIOC, Mohammad-Ali Khatibi, told Persia Digest (PD): “Before reinstating the sanctions, Saudi Arabia announced that it will replace every Iranian barrel of oil taken off the market with two. But in practice, the country’s Minister of Energy confessed that Riyadh was unable to do so and it could not even replace every Iranian barrel with one of its own. Nevertheless, two factors led to a drop in prices at this point.”


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He continued: “The US granted exemptions from the sanctions to eight countries buying oil from Iran for six months. This appeased worries on the market and these countries were able to provide their energy requirements, thus eliminating turmoil over prices. Also, reports were published recently in which certain analysts forecast that oil demand would not be high for next year and production by non-OPEC countries would also have a sharp increase.”

He went on to add: “Based on these forecasts, production by non-OPEC countries in 2019 will increase by two million barrels, while demand will be only 1MM and 200 thousand barrels. These conditions, also nicknamed a non-OPEC tsunami, have created worries about a surplus supply for next year impacting prices.”


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Khatibi emphasized: “If OPEC countries, together with countries operating outside the organization, manage supply, they can stop the drop in oil prices. To this end, they need to reduce production by 1MM barrels a day to balance the market. This may be possible with recent OPEC policies. But we must wait for the upcoming summit.”

To the question of whether US oil sanctions policy against Iran was planning to use the potential for increased oil production by non-OPEC countries, he answered: “Oil production cannot increase in a short period of time; it is the result of years of investment. They have made this investment in previous years and are seeing the results as 2MM barrels of oil per day. This is a high figure. Recent US policies and decisions taken by Trump are not connected to this.”

Speaking about the possibility of non-cooperation by Russia with OPEC due to political bargaining with the West, Khatibi said: “Recently, Putin announced that they do not want oil prices to go below USD 70. If this is Russia’s stance, then it must work with OPEC. Otherwise, it will face a drop in prices and lose out on two fronts. One is its oil revenues and the other the revenues of exported gas. Because the price of gas exported by Russia is calculated based on oil prices. Therefore, if OPEC countries have one incentive for oil price increases, Moscow has two for this cooperation.”

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