With a threat of US sanctions looming large over Iran, the global oil market is expected to remain volatile for the next few months. Crude oil prices are currently trading near 4-year highs amidst growing geo-political concerns in Syria and Middle East peninsula. All eyes will now be on the OPEC meeting due on June 30 which will focus on replacement of supplies from Iran following sanctions by the US.
On May 8, 2018, US president Donald Trump pulled out the US from the historic Iran nuclear agreement, triggering fear of sanctions over Iran’s oil industry. In 2012, US had imposed sanctions over Iran for using nuclear technology in weapons and later removed these in 2016. Iran is the third largest supplier of crude in the Organisation of Petroleum Exporting Countries (OPEC), contributing 13% of the total supply at around 3.82 Mbpd. During the sanctions, around 2.5 Mbpd of crude exports were halted. Renewed sanctions could now reduce global supplies in the existing tightened market. Soothing taut nerves, the Iranian oil minister Bijan Zanganeh recently said that Trump's decision to quit the multinational nuclear deal would not affect Tehran’s oil exports.
Apart from this, the recent spike in crude oil prices have also factored in geo political tensions in Syria and the production cut agreement between OPEC and Russia. The agreement had reduced the global inventory levels. At the OPEC meeting in June, Russia and Saudi are likely to lock horns over extension of production cut agreement. A vulnerable risk in the coming months would also be discrepancy among OPEC members regarding the production levels as Saudi Arabia may increase its production to fill the supply gaps of Iranian supply.
Another negative factor looming over oil prices is the increase in production of shale gas in the US which has recently reached the level of 10.62 Mbpd. In 2019, the output is expected to rise by 1.14 Mbpd to 11.86 Mbpd.
Our in-house view mostly expects oil prices to trade sideways with positive bias subject to sensitivity of geo political tensions. The US sanctions are also likely to be imposed within the next 180 days forcing prices to remain distorted for some time.
The author is a fundamental analyst at Karvy Comtrade Limited