President Donald Trump’s decision towithdraw from the Iran nuclear dealcould pile pressure on OPEC’s pact to limit production and upset the delicate balance among its disparate signatories, analysts say.
Oil priceshit 3½-year highsthis week amid expectations that renewed U.S. economic sanctions willsqueeze Iran’s oil supplyandescalate regional tensionsthat have the potential to further limit the flow of crude.
But the oil price had already been gaining thanks to a 2016 deal between members of the Organization of the Petroleum Exporting Countries and other big producers like Russia, which havereduced global oil supplyby2%.
The group is set to meet in June to decide whether they’ll extend the deal beyond this year. If U.S. sanctions take Iranian oil off the market, leading to further price gains, some signatories may conclude that it is mission accomplished for a pact whose purpose was to drain the oil glut and boost prices, analysts say.
Some countries, like Russia and Kazakhstan, are itching to open the taps and take market share, while others, such as Saudi Arabia, want tokeep an agreementthat has so far led to higher oil prices. Saudi Arabia has already said it will stand in to replace lost oil from Iran, a task other nations will want to share.
Mr.
Trump’s move has ramped up geopolitical tensions in a grouping already at odds.
On Friday, Iranian oil minister Bijan Zanganeh said his country wants oil
prices at around $60 a barrel and that some in OPEC are working for U.S.
interests given that higher prices benefit shale production.
If the agreement is scrapped and producers go back to pumping at full tilt, that will flood the market and sink prices again, analysts say.
"OPEC may need to adjust the production limits but it won’t be an easy decision as the Saudis want higher prices,” said Hasan Qabazard, former director of OPEC’s research division who is going to the June meeting. "Everything is on the table.”
It isn’t yet clear how much Iranian output will be taken off the market. Some analysts say the impact of renewed U.S. sanctions, which aren’t supported by Europe’s biggest economies, will be negligible while others predict that more than 700,000 barrels a day of crude could be hit. Previous sanctionsby the Westagainst Tehran in 2012 took around one million barrels a day of Iranian oil off the market.
Two OPEC officials said the Iran issue won’t need to be discussed in June but could come up at the next meeting before year-end.
"For now all [OPEC has]to do is a verbal promise that producers will fill in the gap when needed. By end of this year, we may not have the same deal in place for 2019,” said an OPEC official from a Persian Gulf oil-producing country.
Economists say that expensive crude, which is up more than 50% since last year, could reduce demand and even incentivize some consumers to switch to renewable energy sources. Meanwhile, higher prices provide a boost to nimble U.S. shale drillers, chipping away at the market share of OPEC, Russia and its allies.
Now, the resumption of U.S. sanctions on Iran adds a geopolitical twist to the oil flow.
"The [OPEC] deal began as a supply and demand agreement and it wasalready hard to forge consensus. When you throw politics into the mix, it makes things much more complicated,” said Olivier Jakob, managing director of Swiss-based oil research firm Petromatrix. "We could be coming to the end of the true supply control agreement.”
Saudi Arabia wants to push oil prices up above $80 a barrel this year, as it seeks to raise revenue and prepare for the initial public offering of Saudi Arabian Oil Co., or Aramco, the state-owned energy giant.
Iran and other OPEC members are concerned that the biggest beneficiaries of very high prices are U.S. shale producers.
"Some OPEC members [are] playing into U.S. hands” by supporting Washington’s decision to pull out from the nuclear pact, Mr. Zanganeh said in a tweet sent by his ministry.
Russian oil companies, meanwhile, have been itching to raise output after delaying long-planned projects due to the agreement with OPEC.
"The Russians have been wanting to produce for a long time. Now they could view the Iran issue as an excuse to end or push to relax the deal,” said Tamas Varga, an analyst at brokerage PVM Oil Associates.
To be sure, some analysts believe Iran’s troubles could also present OPEC and its allies with an opportunity to strengthen their pact. Saudi Arabia has already indicated it seeks to continue the cooperation beyond the current agreement.
Iran may provide an opening. To make up for Iran’s lost oil, OPEC could relax the deal’s restrictions, which would satisfy some of the members, like Iraq or Kazakhstan, that are chafing under the cuts, said Ellen Wald, nonresident scholar at the Washington, D.C.-based Arabia Foundation.
"This would help strengthen their commitment to each other and to the group,” Ms. Wald said. "This is a real opportunity to... make the group a permanent market institution and they don’t want to let this opportunity go.
ByGeorgi Kantchev
("Wall Street Journal”, May 11, 2018)
