(Persia Digest) - The outcome of this week’s Opec meeting in Vienna is uncertain. The sharp fall in prices to below $60 a barrel for Brent crude and around $50 for West Texas Intermediate is beginning to be painful for producers whose economies depend on oil revenues. But there is, as yet, no agreement on who should cut supply and by how much.
Nick Butler reports in FT that the key unknown factor in the calculations of all those involved is the impact on the market of the newly strengthened US sanctions on Iran. Will they succeed in cutting off revenue and forcing Tehran back to the negotiating table?
The increase in prices this year to a peak in early October of $85 for Brent crude was fuelled by fear that the rhetoric of the Trump administration might be based on a real plan to cut off all Iranian oil exports. That would have reduced global trade by some 2.5m barrels a day, producing a genuine physical shortage of oil for the first time in decades.
Since then, the dire predictions have been mitigated by events. First, the US administration granted waivers on trade in oil for the next six months from Iran to a range of countries including big customers such as India, China, Japan and South Korea. That allows at least half of Iran’s current trade to continue unmolested.
Second, US president Donald Trump has neatly pinned the Saudi crown prince Mohammed bin Salman into a corner. The murder of the dissident journalist Jamal Khashoggi gave the US president the opportunity to step in as defender of Prince Mohammed. The price for his support is the increase in Saudi production over the past few weeks to more than 11m barrels a day, which has led to the sharp fall in prices and was met with a tweet of thanks from the White House.
The immediate effect has been the reduction of oil prices. With any potential gaps in supply covered, there is no reason for shortages. On the contrary, the speed of the recent fall suggests that there is a surplus, and that is why Opec will be considering cuts.
Whether this price level is maintained now depends on the Iranians. Do they remain defiant in the face of US pressure to end their nuclear programme, or do they decide they cannot win an open confrontation and must submit to US demands to survive?
The answer depends on a fine judgment of the balance of power. As he begins his campaign for re-election in 2020, Mr Trump wants Tehran to concede, but embroiling the US in another complex and unpredictable conflict in the Middle East would be a high cost. The Iranian government wants to stay in control and avoid the risk of growing public protests against the economic problems caused by its isolation.
If the Iranians hold firm and refuse to renegotiate the 2015 international deal restraining their nuclear activity, the US will have to decide how far it wants to tighten the screw by removing the waivers and increasing sanctions.
My bet, however, is that the leadership in Tehran, with active support from the European governments that support a strategy of engagement, will adopt a more careful path. They will offer just enough small concessions to bring the US to the negotiating table and force Mr Trump to hold back from further sanctions.
The EU may be encouraged to play a mediating role by the calculations of those such as Democratic pollster Stan Greenberg that Mr Trump is vulnerable to defeat in 2020 — in which case Tehran could afford to play for time.
If that assumption is correct, the chances are that a substantial amount of Iranian exports would be restored to the market over the next few months. According to the latest data from Platts, Iranian oil exports in November at around 800,000 b/d were more than 1.5m b/d less than the previous six-month average of 2.4m b/d. The return of those exports could only add to the excess of supply and put further downward pressure on prices.
The industry — which takes a longer-term view of the energy market than short-term traders or hedge funds — well understands the situation. Its leaders have expressed caution about the surge in prices and plan their business on the basis of prices reverting to somewhere in the region of $50 to $65 for the foreseeable future. Costs have been cut and the sector is viable at that level.
Yet further politically driven price volatility seems inevitable. My reading of the likely outcome is one view, but there are equally credible forecasts of ever-tighter sanctions cutting off most of Iran’s trade for a sustained period of time.
The potential swing in the country’s supply — between minimal volumes below 500,000 b/d and 2.5m — is unpredictable and inherently destabilising. Traders and speculators will need very strong nerves over the next few weeks.
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