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Oil Prices Rise as U.S. Withdraws from Iran Nuclear Deal

May 24, 2018

 

The oil market has recently seen an increase in prices as the U.S. pulls out of the Iran nuclear deal, formally known as the Joint Comprehensive Plan of Action (JCPOA). In addition to petroleum trade, the sanctions will include restrictions on transactions with the Iranian central bank, shipping agencies and other insurance firms that have an impact in oil trading. While the removal from the plan can create potential unknowns for the future of oil prices, a definite reduction in Iranian supply will likely exacerbate market deficits thus further suggesting an upward pressure on oil pricing.

 

As the overall oil market tightens, the near-term price is expected to rise towards $80 per barrel, which has been above the long-term market expectation. Not only that, but Venezuelan output has drastically decreased over the past six months and a lack of offsetting increases from other members of the cartel. This has led to the OPEC’s overall output to fall around 500,000 barrels per day below quota. The U.S. has not been able to compensate for declines elsewhere because it is facing constraints in U.S. production growth. This has led to a positive trigger in the oil market.

 

Analysts say, “We assume Iran’s oil exports will fall by 150,000 b/d in the second half of the year compared to the first half of the year. The amount potentially could rise to 300,000 b/d in 2019, assuming close but not full compliance with a 20% requested curtailment on a base of roughly 2 million b/d of exports.” This means the net impact on the overall oil market could potentially be greater if condensates and liquified exporters are also affected the same way. However, as historical data has shown, the most important piece of this puzzle comes from the OPEC’s final decision on tightening which will determine the future of the oil market.

 

The ultimate impact on balancing supply and demand in the oil market will be a function of OPEC and Russia’s responses to rising oil prices and tightening balances in the market. As prices trend higher than expected, pressure to increase supplies will start to emerge as allies will want to compensate for any supply reductions in oil output from Iran. A higher price also decreases demand, which would mean that certain actions will have to take place in order to correct the supply and demand balance. For now, it seems as if investors should cautiously watch for increases in oil prices, be aware of tensions rising from the U.S. backing out of the nuclear deal and the overall reduction in oil output globally.

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