For days, oil prices have pulled back on rising supplies, and concerns that global economic growth and demand will fall victim to the US-China trade war
The American Petroleum Institute (API) reported another crude oil inventory build of 5.69 million barrels last week. That’s the fourth build we’ve seen in as many weeks.
In addition, global oil supply is also rising as Russia, Saudi Arabia and the U.S. pumped 33 million barrels per day in September.
At the same time, oil has been caught in the global market slump, fueled by a trade fight between the world’s two largest economic super powers.
“There are two downward pressures on global oil demand growth. One is high oil prices, and in many countries, they’re directly related to consumer prices. The second one is global economic growth momentum slowing down,” said IEA chief Fatih Birol, as quoted by Livemint.com
However, inventory build-up may not be enough to overshadow Iran sanctions.
This Sunday, U.S. sanctions on Iran will begin, and Washington has made it clear it expects Iranian oil customers to stop buying. In fact, imports of Iranian crude have recently declined, with South Korea and Japan already cutting back.
According to CNBC, "The bullish argument for crude still centers on Iran sanctions, which are due to begin in November, and continued output declines from Venezuela," said William O'Loughlin, investment analyst at Rivkin Securities.
As sanctions take effect, buyers for Iran’s crude should dry up.
Plus, it isn’t clear how easily – or quickly Iran’s crude-oil output can be replaced. For example, should the world lose Iran’s 2.7 million barrels per day, OPEC may not be able to fill the gap.
Granted, there’s a large amount of spare capacity on paper, but OPEC’s reserves are more than likely overstated.
In short, there’s a good chance we’ll see higher oil prices once sanctions begin.
There are two countries that won’t completely cut off supply, though.
China for example, has already said it would continue buying Iranian oil, despite Washington’s threat to block Chinese companies from doing business in the U.S. Then again, China doesn’t seem greatly concerned with the U.S. threat, given the current trade war.
And while India has sought to appease Washington, it’s in a tough spot, as the country imports up to 80% of its oil needs. “We cannot end oil imports from Iran at a time when alternatives are costly," noted the Indian government, according to Reuters.
While there were reasons to be bearish on oil prices, Iranian sanctions could send oil prices higher, at least for the foreseeable future.
Be sure to stay tuned to The Cheap Investor for more on this developing situation.
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