Oil near multi-year highs as Iran sanctions tighten supply outlook

Phillip Cunningham
May 12, 2018

WTI oil, the U.S. benchmark, also gained early on Thursday, trading 0.75% higher at $71.67 per barrel, having also seen significant gains on Wednesday.

The United States said on Tuesday that it plans to impose new sanctions against Iran after abandoning an agreement reached in late 2015 that curbed Tehran's nuclear activities in exchange for removal of U.S. and European sanctions.

Oil extended gains above $71 a barrel as a conflict between Israel and Iran ratcheted up, increasing prospects for tighter global supply after the USA renewed sanctions on OPEC's third-largest producer.

Under the deal reached in 2015 between Iran and six major powers, Tehran agreed to curb its nuclear programme in return for lifting most worldwide sanctions that crippled the country's economy.

Iran increased its oil production by 1 million barrels per day after sanctions were lifted back in 2016.

Since then, Iran ramped up supplies, producing 3.81 million bpd in March 2018, nearly 4 percent of global output.

Analysts have also pointed out that rising gas prices could deplete money saved by the average American due to the tax overhaul bill passed late a year ago by Trump and Republicans in Congress.

"We expect that around October Iranian exports will be down by 500,000 barrels per day (bpd) and eventually fall by 1 million bpd", the bank said. Indeed, Saudi energy diplomacy - namely its ability to credibly convince Iranian crude buyers that acquiescence with USA policy will not come at economic loss - will be a key determinant of the success or failure of the Trump administration's new course. Japan may follow suit.


"It's quite possible that surging United States shale production could easily fill the gap left by Iran", Eberhart said. USA oil output reached another record high last week, hitting 10.7 million bpd.

In the wake of new USA sanctions, some buyers of OPEC's third-largest oil producer said on Wednesday they would seek US exemptions to purchase Iranian crude.

Brent crude futures fell 29 U.S. cents to US$76.92 a barrel by 1432 GMT, having risen earlier in the day to US$78, their highest since November 2014. These sanctions will be far less effective than those imposed in 2012, with their success or failure largely outside of US control.

Zanganeh said foreign investment was needed to develop Iran's its oil industry, but that it could survive even if foreigners made a decision to stay away for fear of USA penalties. Saudi Arabia signaled it could make up lost supplies, and Goldman Sachs Group Inc. said there's a chance prices may exceed its forecast. The effects may be muted as major Asian importers, China chief among them, are likely to continue buying Iranian oil.

One factor that could partially mitigate any shortfall from Iran is soaring United States oil output. Elsewhere, the U.S. Labor Department reported hourly earnings for all employees were static from March to April.

The Organization of the Petroleum Exporting Countries, Russia and several other producers began to reduce oil output in January 2017 in an attempt to erase a supply glut and prop up prices.

Futures for September delivery on the Shanghai International Energy Exchange rose 2.1 percent to 475.1 yuan a barrel, climbing for a fourth day.

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