Despite significant tension ahead of its meeting, the OPEC-NOPEC coalition (OPEC+) agreed at the end of June to increase its cumulative output – in response to the tight global supply situation. The agreement was facilitated by the formulation of a final declaration that was kept deliberately vague, which allowed practically all participants of the meeting to declare themselves as diplomatic OPEC winners.
In his game of atomic poker with Iran, US President Trump has yet to personally reach a definitive decision on how rigorously – and within which timeframe – he wants to force Teheran’s crude oil exports from the market. Instead he recently let the US Department of State make its mark with a “zero tolerance stance” (short-term total embargo, no exemptions from secondary sanctions for Iran’s customers). Although this position was mitigated somewhat by other voices, the surprisingly harsh sabre-ratting by the US is likely to lead to a scenario whereby Iran’s crude oil customers will have to exercise greater restraint than planned as regards their imports.
The greater the US’ success in thwarting Iranian exports in the short term, the greater the upside pressure on the price of crude oil and gas in the US – particularly in the current environment with several supply-related problems (e.g. Libya, Venezuela). On the other hand, the US President would especially like to contain the US gas price ahead of the midterm elections. Matters are complicated further by the potential for rising crude oil prices to exercise pressure on the central banks to increase their key rates more than would benefit the global economy, which is already burdened by the escalating trade war. The US could deal with this home-grown conflict of objectives through clever timing of its sanctions policy. It is in fact under no time pressure whatsoever to challenge Iran to such an extent, especially in the current somewhat difficult supply situation. From a purely tactical perspective, it would be more effective for the US to wait until the second half of 2019 before increasing pressure on Iran, after resolving the infrastructure problems in the Permian Basin in Texas – and therefore the temporary drag on growth in US crude oil production. With the advantage of US crude oil production growing at record speed, the threatening posture vis-a-vis Tehran would be much more imposing and significantly defuse the aforementioned conflict of objectives.
Conclusion: Temporary production downtime in Canada, presumably longer-lasting loss of production in Libya and heightened US sanctions on Iran (and its crude oil customers) – resulting in lower exports – are further straining the supply situation on the crude oil market. While OPEC+ can and will provide the necessary crude oil, it will have to dig very deep into the reserve capacities to do so. In light of the latest developments, we are raising our forecast for the price of crude oil significantly, especially for the coming four quarters, to USD 75 per barrel. To shield the price of US gas from a further increase ahead of the midterm elections, US President Trump will have to decide soon whether he might offer concessions to Iranian crude oil customers by way of exemptions or optionally resort to the strategic use of the US crude oil inventories as a last resort.