President Donald Trump just announced the U.S. would withdraw from the Iran nuclear deal and again impose economic sanctions.
And, of course, fear of that sent oil to over $71 a barrel.
But analysts don’t think we'll see a super-spike.
While sanctions could reduce Iranian output by about 200,000 barrels per day (bpd), it may not cause much harm. That’s because the world is still awash in supply. Plus, any shortfall from Iran is likely to be replaced by America’s own oil production, which is expected to hit a record 11 million bpd this year alone.
Saudi Arabia also has the ability to increase supply.
At the same time, many analysts believe some nations will ignore the new U.S. sanctions and continue buying Iranian crude. China, Iran's largest customer, may be especially reluctant to cut off Iran because of the recent trade tensions with the U.S.
“One of the most important deadlines for oil markets was today, with the announcement, the U.S. is reinstating sanctions against Iran,” said Luisa Palacios, a director at Medley Global Advisors, as quoted by World Oil. “The second most important deadline is May 20, when Venezuela holds presidential elections.”
Those elections could trigger new sanctions, which could impact oil or refined product flows. The U.S. has already said it could impose further sanctions if it believes democracy is being undermined.
That could force oil prices even higher.
Venezuela has already seen output fall almost 40% since 2015, to 1.5 MMbpd thanks to political turmoil and an economic meltdown under President Nicolas Maduro. Now, with global creditors eyeing Venezuelan assets and the U.S. considering more sanctions, production could drop further, to 1 MMbpd, say Societe Generale analysts.
In the meantime, there are other factors pushing up prices, including qualms around elections this month in Iraq.
Iraqis will head to the polls on May 12 to elect a new national parliament, which will serve as the basis for forming a new government. Unfortunately, unlike 2014 and 2010, “when large coalitions encompassing a wide spectrum of political groups ran, the 2018 election landscape is splintered by intra-sectarian divisions and fragmented Shia, Sunni and Kurdish factions,” notes the Iraq Oil Report.
There is a good deal of uncertainty as to what will truly happen with oil, especially as we head into summer driving season, it’s all a wait-and-see at this point.
Stay tuned to The Cheap Investor for more on this developing story.