Oil View: No change in price forecast despite US-Iran deal breakdown – The US stepped out of the Iran nuclear deal and will impose new sanctions on the country. Other countries will get a maximum of 180 days to comply with these new economic sanctions. The market had largely priced in this scenario. Perhaps the main surprise was the hawkish tone of US President Trump. The initial reaction of oil prices was volatile, though in the end, oil prices saw some further gains (the Brent benchmark rose to USD 77/bbl). What does this mean for Iranian exports of oil and global supply? In addition, what does this mean for oil prices?
Starting first with the impact on global oil supply, Iran produces roughly 3.8 mb/d, of which 2.2 mb/d is exported. Exports to Europe amount to 0.8 mb/d. These exports will be impacted the most by the US sanctions, even if the European partners succeed in extending the Iranian Nuclear deal together with Russia and China. Iran will probably shift a proportion of these exports away from Europe and instead to Asian countries, mainly China. The remainder (max 0.5 mb/d) will be either exported to other countries (with limited ties to US), consumed locally, or used for electricity generation. The European imports will most likely be covered by increased exports from (mainly) Saudi Arabia and Iraq. OPEC still has the production cut agreement in place, which basically indicates that there is 1.2 mb/d on the shelf, which can return to the market in a relatively short period of time. Some of this can be used to mitigate lower Iranian exports. The OPEC meeting on 22 June will therefore be even more important to watch and see how OPEC will deal with the supply issues. After all, besides lower Iranian exports, the production in Venezuela and Angola are also under pressure. Still, in the near term, supply shortages seem unlikely. In the longer term, supply shortages were already a threat and the situation has now been aggravated.
For oil prices, volatility will remain high in the near term as a result of increased uncertainty. Nevertheless, since this development will not immediately lead to shortages, the upside potential for oil prices looks limited. Most of the supply risk looks to be already priced in. Obviously, if tensions in the Middle East escalate, then oil prices will rise further. However, this is not our base case scenario. Please also note that oil prices (both in USD and EUR) are testing important technical resistance levels. A higher break could be seen as another positive signal for further price gains. The market is still positioned for further price gains. That was the main reason for the impressive rally up until yesterday’s announcement. The question is whether oil prices could continue to move higher on the news, or whether we have seen the worst, which could trigger some profit taking on these existing long positions. We think that the risk of a correction somewhat lower is still the more likely. Overall, for the time being, we do not see a reason to revise our forecasts higher. We maintain our end of year forecast for Brent of USD 75/bbl. (Hans van Cleef)