Oil at $80 in medium term? Iran chaos suggests so

By Tarun Satsangi

Fear of likely sanctions on Iran had already added a fair amount of premia to oil in recent weeks, taking prices from $ 60 to above $ 70.

Yesterday, WTI crude oil prices boiled to $ 71.20/bbl, the highest level since December 2014. Brent oil has soared to $ 77, the level last seen in November 2014 after US President Donald Trump decided to pull out of the Iran nuclear deal. He also made his intention clear to impose additional economic sanctions on the Islamic Republic. The outcome was most feared as Trump had termed the nuclear accord as the worst deal. New sanctions may include Iran’s oil, shipping and banking sectors.

On the other side, Iranian President Rouhani responded with his intent to stick to the agreement and wants to cooperate with the remaining five countries in the deal, namely China, Russia, the UK, France and Germany. Iran mainly exports oil to China, India, the EU, Japan and South Korea. Therefore, response from these countries will define the likely reduction in the Iranian exports. The United States did not go for any import of oil from Iran. There is no doubt about reduction in Iran’s crude oil exports later this year as some countries will shift to alternatives for avoiding any trouble with Trump.

Iran pumped 3.8 mbpd in March 2018, almost 4 per cent of global production. Its oil exports averaged over 2 mbpd in Q1. During last sanction, Iranian supplies came down by 1 mbpd. This time, we believe supply may fall by 0.5-1 mbpd, depending on how many countries support the US decision.

Demand-supply situation is almost balanced now, but this move will result in tight global supplies if not lead to supply shortage, raising possibility of further jump in oil prices towards $ 80/bbl over the medium term. As this event is fully priced in and everybody knew that it was about to happen, buy on rumour and sell on news theory may work and lead to some profit covering trades before prices start inching higher again.

(Tarun Satsangi is Head of Research for Commodities and Forex at Globe Commodities. He has 12 years of experience in financial markets. Views expressed in this article are the author’s own and do not represent those of ETMarkets.com. Readers are advised to consult their financial advisers before taking any position based on these observations.)