Iran Sanctions Keep Oil at 3½-Year Peak

Sarah McFarlane

The Wall Street Journal

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@sarah_mcfarlane
sarah.mcfarlane@wsj.com

May 10, 2018 6:31 a.m. ET

Oil prices hit fresh 3½-year highs Thursday, with the U.S.’s withdrawal from the Iran nuclear agreement continuing to reverberate across markets.

Brent crude, the global oil benchmark, was up 0.5% at $77.57 a barrel on London’s ICE Futures exchange, having hit $78.00 earlier, its highest level since November 2014.

On the New York Mercantile Exchange, West Texas Intermediate futures were trading up 0.8% at $71.66 a barrel.

Uncertainty remained over the extent to which the renewed sanctions will curb Iran’s oil exports. The U.S.’s withdrawal from the 2015 international deal, which saw the easing of sanctions against Iran in return for curbs to its nuclear program, means sanctions will be reinstated in six months’ time.

A gas flare on an oil production platform in the Soroush fields in the Persian Gulf, Iran, is seen alongside an Iranian flag. Photo: raheb homavandi/Reuters

In the past, sanctions against Iran have cut the country’s exports by around 1 million barrels a day. Giovanni Staunovo, commodity analyst at UBS Wealth Management, forecasts the hit to Iranian exports over the next six months will amount to around 200,000-500,000 barrels of oil a day.

“While the disruption we anticipate is a small fraction of global production of about 98 million barrels a day, it would further tighten the oil market this summer,” Mr. Staunovo said.

Iran is the third-largest oil producer in the Organization of the Petroleum Exporting Countries, with output of around 3.8 million barrels a day. The anticipated lost exports from Iran will exacerbate tightening global supplies, as OPEC’s efforts to cap output since the start of 2017 had already drained global stocks, diminishing any buffer.

Saudi Arabia, the quasi-leader of OPEC and the petrostate with the largest amount of spare production capacity, has already pledged to help stabilize the oil market, saying it would “mitigate the impact of any potential supply shortages” caused by the new sanctions.

This has raised questions about the future of the deal between OPEC and other producers including Russia to cut output, which was due to expire at the end of 2018.

Given the loss of exports from Iran can be offset by other OPEC members, “is the historical OPEC/non-OPEC pact as good as finished?” asked Tamas Varga, analyst at brokerage PVM.

Analysts said Saudi Arabia’s position within OPEC would be hindered by its willingness to offset barrels lost on the international market.

“Before we had Saudi Arabia deciding on its own oil policy, whereas now I think the U.S. is influencing it,” said Olivier Jakob, head of consultancy Petromatrix, adding that this would make coordination between OPEC members more challenging.

There were heightened tensions in the Middle East following the U.S. withdrawal from the Iran deal, indicating risks of a wider conflict, analysts said.

In Syria, Israel’s military carried out strikes against Iranian targets, after it said Iranian forces based there fired rockets at its soldiers.

“Trump’s decision plays into dynamics that were already unfolding,” said Richard Mallinson, analyst at consultancy Energy Aspects. “It’s extremely concerning because we’re seeing direct exchange of fire between Israeli forces and Iranian forces and that opens the door for a much broader escalation.”

Nymex reformulated gasoline blendstock—the benchmark gasoline contract—rose 0.5% to $2.18 a gallon. ICE gasoil changed hands at $675.50 a metric ton, up $1.25 from the previous settlement.

Write to Sarah McFarlane at sarah.mcfarlane@wsj.com

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