LONDON, May 9 (Reuters) – President Donald Trump’s decision to withdraw from the nuclear agreement with Iran marks the end of the current output agreement between OPEC and its allies.
OPEC is likely to insist the current agreement remains in effect, at least for now, but the prospective removal of several hundred thousand barrels per day of Iranian exports from the market will require a major adjustment.
Saudi Arabia has already promised to “mitigate” the impact of any potential supply shortages, in conjunction with other suppliers and consumer countries, in a statement released immediately after the sanctions decision.
The kingdom is customarily coy about how it might respond but the prospective removal of Iranian crude from the market will send oil prices sharply higher unless other producers step up to fill the gap.
As a practical matter, only Saudi Arabia, the United Arab Emirates, Kuwait, Russia and the United States have the ability to raise production and exports in the short term.
Saudi Arabia and its close allies Abu Dhabi and Kuwait hold almost all the spare capacity that could respond quickly to a reduction in Iranian exports.
U.S. shale producers could also increase their output but it would take time and their light crude is not a good substitute for heavier Iranian oil.
Russian firms may also hold spare capacity and could certainly increase output over a 12-month horizon. Their crude is a close equivalent to Iranian grades.
The United States and Saudi Arabia appear to have reached a high-level political understanding in which the United States will intensify pressure on Iran in exchange for Saudi Arabia agreeing to help avoid a spike in oil prices.
The existence of an understanding was confirmed by the U.S. Treasury Secretary who told reporters on Tuesday that “we have had conversations with various parties … that would be willing to increase oil supply”.
In retrospect, the president’s tweet on April 20 blaming OPEC for high oil prices can be seen as part of the negotiating process to reach an understanding with Saudi Arabia.
In effect, the United States agreed to implement tough sanctions, and Saudi Arabia agreed to limit the impact on oil prices.
The outlines of that agreement remain unclear, and may not be entirely clear to Washington and Riyadh, but the understanding is vital to the successful implementation of sanctions.
U.S. gasoline prices are already averaging just under $3 per gallon, the highest level since late 2014, up from $2.50 a year ago.
via The Global Warming Policy Forum (GWPF)
May 9, 2018 at 09:17AM