Keeping up with the Crude

In 2014, the crude oil output skyrocketed as a result of the tug of war between the USA and Saudi Arabia. The crude oil prices tanked while oil export-oriented economies like Venezuela, Ecuador, and Nigeria suffered. OPEC meetings became irrelevant, and the organization seemed disjointed with the escalating feud between Saudi Arabia and Iran. This higher supply awkwardly matched with the slowdown of China keeping the oil prices repressed. After months of meetings and disagreements, OPEC along with Russia and USA decided to introduce an output cut to push prices higher. Last week, Brent future reached $80 which is a three and a half year high for the most significant energy resource.

The recent surge in the prices was mostly driven by the political unrest caused when Donald Trump opted the USA out of the historic Iran Nuclear deal. Trump re-imposed the sanctions on Iran thereby making an official exit from the agreement which was an Obama initiative. The European Union and the bloc leaders have stood their ground and vowed to stay in the deal as long as Iran remains thoroughly committed to it.

The withdrawal from the Joint Comprehensive Plan of Action (JCPOA), also known as the Iran deal was an international agreement designed to prevent Iran from acquiring nuclear weapons, and to ensure the peaceful nature of their nuclear activity, lifting economic sanctions against their country. The participants of this deal were US, China, UK, Germany, France, Russia and the European Union. Trump has been calling this deal “defective” and has been warning Iran to “fix it.” The US has broken the, and the sanctions will hit Iran and the countries doing business with Iran, especially Europe which has heavily invested into Iran.

Though the other participants of the deal continue to show interest in keeping the arrangement, the sanctions have started intimidating businesses. French oil and gas giant Total threatened to withdraw from $2 Billion natural gas project due to looming US sanctions unless the company is provided with some immunity by the US treasury.

The shipping companies like Maersk Tankers and Torm have already refused to provide tankers due to fear of complications in cargo and insurance payments. This may have the significant impact on the oil exports by Iran.

India imports 80% of its oil from the world. India’s import of oil from Iran surged to 640,000 barrels per day in April. The current rally in prices may push up India’s import bill by up to $50 billion, impacting the current account deficit. The petrol prices increased by a rupee per liter since Monday.

While the JCPOA fails to create an impact, political unrest in Venezuela has prompted oil traders to expect a potential disruption in oil supply from the recession hit economy. While Venezuela votes on Sunday in the midst of the political instability, it is important to note that Venezuela’s oil production is near 33 year low. The country has a massive debt burden followed by hyperinflation and lack of technology. The output cuts imposed by OPEC last year will continue at least by the end of 2018 which means, Venezuela could have reduced its output to 1.1 million barrels per day.

Now the question arises, will the oil prices touch $100? Venezuela is the home to world’s largest oil reserves, and the decline in production from the South American country has supported recent rally in the oil prices. However, it is not only Iran and Venezuela which has helped the surge. The increased tensions between Saudi Arabia, Iran, Libya, Iraq, Syria, and Yemen represent uncertainty. Such events will disturb the global supply. On the contrary, American Shale production has boosted at the time when International Energy Agency (IEA) has forecast a decline in the worldwide demand from 1.5mb/d to 1.4mb/d reflecting the impact of higher crude prices.

It is crucial for the oil traders to emphasize on the fundamentals because, with the expected future shortage in supply, the global demand and the geopolitical factors are signaling a push to oil prices above $80.