I have often
wondered why the US is adamant at containing oil export from Iran. This morning
I have found some clue after reading the weekly email sent to me by Oil &Energy Insider, captioned “A Crucial Period for Oil Markets”. It covers many
news but two most important for me are: "Oil prices rose this week on the back
of continued outages from Venezuela and Iran. The EIA also warned “We are set
to enter a 'crucial period' for oil markets”.
The report
also gave details that U.S. Energy Secretary Rick Perry held two high-profile
meetings, one with his counterpart from Saudi Arabia and the other with his
Russian counterpart. These meeting were aimed at ensuring ample supply of crude
oil after re-imposition of sanctions on Iran become into effect in November. Perry
praised OPEC as a whole and Russia for responding to higher prices by
increasing production, even using the word “admiration” as something the cartel
and Russia deserved for their efforts to keep oil prices under control. For my
readers understanding the US objective will become much clear after reading the
following details.
By pulling
itself out of the agreement with Iran, the US aims at achieving multiple
objectives, the top of the agenda item being initiating the hype for the change
in regime in Iran. The sole purpose of the US is to cripple the Iranian economy
to an extent that could lead to regime change. However, observers familiar with
Iranian politics have warned this is an unlikely outcome. Crippling Iranian
economy will also please Saudi Arabia, which has been brainwashed to the level
for singing the manta, “Iran is a bigger enemy as compared to Israel”.
Another key US
objective is to mend its relationship with Russia. While the US administration
has been trying to bring down Iranian oil export to virtually zero, it is encouraging
Russia to keep its production at the highest level to ensure there will be
enough oil even when Iran’s exports slump. There is a need to understand the
shift in the US policy towards Russia. The situation is particularly interesting
as U.S.-Russian relations are at a historic low but Russia is one of the world’s
top oil producers, enjoying the power to control global oil supply and prices.
According to
Russian Energy Minister Alexander Novak, the global oil market remains fragile
because of production declines and geopolitical unrest. “This is huge uncertainty
on the market – how the countries located in Europe and Asia Pacific region,
which buy almost 2 million barrels per day of Iranian oil will act. The
situation should be closely watched, to make the right decisions,” said Novak.
He also said Russia could step in if the market needs more supply. Russia has
potential to raise production by 300,000 barrels per day.
Worries of
OPEC, led by Saudi Arabia are multiple. OPEC has cut its 2019 oil
demand forecast because of economic uncertainties arising from Sino-US trade
war. The 1.41 million barrels per day (bpd) demand growth forecast is 20,000
bpd lower than last month’s figure. “Rising challenges in some emerging and
developing economies are skewing the current global economic growth risk
forecast to the downside,” said an OPEC report.
The protests
and riots in Iraq’s oil-rich southern region are flaring up again, potentially
posing a threat to the country’s record oil export levels. Some companies have
taken their foreign workers out. Production hasn't been hit yet, but if anyone
facility goes down, the production loss could be as high as 800,000 bpd, so
it's a big story to watch. Global experts also highlight that the lack of spare
capacity makes such an outage especially worrisome. They also say that the real
problem right now is limited availability of options to absorb shocks.
Within the
US, Hurricane Florence is battering the coast of North and South Carolina, but
there very little fallout is expected for the oil market since no oil
refineries or upstream production facilities are located in those states. But
if the Hurricane travels further inland into the Appalachian region, it could
curtail shale gas production.
The US shale
companies emerge clear winners. They took advantage of relatively high oil
prices in the second quarter to lock in hedges beyond 2019. Permian shale
drillers increased 2020 hedging by 431 percent in the second quarter of this
year, an indication that E&Ps are worried about pipeline bottlenecks stretching
beyond 2019. The quantum of hedging appears unusual. The risk of hedging is
that some companies could eliminate upside exposure if pipelines are completed
on time and oil prices rise.
It may not be
wrong to infer that after minimizing oil exports from Libya and Venezuela, the
next likely US targets are Iran and Iraq. It is also evident that in the US pursuit
to keep oil prices high, it is fully supported by Saudi Arabia and Russia. A
point to be watched microscopically is how many countries succeed in acquiring US
exemption to buy oil from Iran?
