US and global crude oil prices are near six-month highs as the White House said Monday it would not extend exemptions to Iran’s oil sanctions that were set to end in May. The news triggered an immediate spike in oil prices and comes as gasoline demand seasonally rises as Americans prepare for summer road trips.
Beth Mosher, spokeswoman for AAA, which tracks gasoline prices, said based on the Iranian news, AAA forecasts nationwide gasoline prices to rise over $3 a gallon this summer. That’s 15 cents a gallon more than current prices and above last summer’s prices, she said.
The end to Iranian sanctions waivers throws uncertainty into a market already dealing with lower global supply due to agreed-upon production cuts by Organization of Petroleum Exporting Countries. Other Opec members are in trouble, too. US sanctions on Venezuela come into effect at month’s end, and renewed tensions in Libya threaten to disrupt their supply.
“President Trump’s decision to zero out Iran sanctions waivers represents the ultimate high-wire act for oil prices,” said Helima Croft, global head of commodity strategy at RBC Capital Markets.
In November the US re-imposed sanctions on Iran, but allowed waivers to some of Iran’s biggest customers, including China and India. Iranian oil exports averaged more than 1.7m barrels a day in March, including nearly 628,000 barrels sent to China each day and more than 357,000 sent to India, according to S&P Global Platts data. Oil-market participants expected those waivers to be reinstated, which is why the market was surprised by the White House’s statement “to bring Iran’s oil exports to zero”.
Countries that continue to buy Iranian oil will risk US sanctions. Iran responded to the news by threatening to close the Straits of Hormuz, the world’s busiest oil-transit lane. That would cut off about 20% of seaborne crude oil and products, Barclays said.
Donald Trump is betting that Saudi Arabia and other Opec members make up for the shortfall.
Although news reports cite some willingness by Opec members to cover any lost Iranian supply, several oil-market analysts said cartel members will be cautious about adding more barrels to the market. Last year when the sanctions were first announced, Opec members topped up production in anticipation of reduced global supply, but when the waivers were granted, the extra oil caused a mini-glut and prices fell.
Jay Hatfield, portfolio manager of InfraCap MLP exchange-traded fund, said Saudi Arabia’s production is below Opec’s quota, so it could increase output without running afoul of other members. But don’t expect Saudi Arabia to automatically open the taps.
“They can claim they’re producing more, but the Saudi’s learned their lesson. They did Trump’s bidding last time and then he pulled the rug out from under them. I don’t think they feel like they are beholden to Trump at this point,” he said.
The next Opec meeting in June will be critical, said Bill O’Neill, principal at commodities consulting firm LOGIC Advisors. That’s when the agreement between Opec and Russia to lessen global production expires. “That will tell us just how tight the market is,” O’Neill said, noting Russia has made some signals to up output.
The US also needs help from Iran’s buyers to make the sanctions work. While some of Iran’s customers may shop elsewhere for oil to not risk US sanctions, getting a buy-in from China will be important. China’s foreign minister said in a press conference it opposed unilateral sanctions. Croft said Chinese refineries with access to US capital markets may pull back, but she doesn’t expect the country to completely stop buying Iranian oil.
Amarpreet Singh, analyst at Barclays, said it will be tough for both India and China to switch from Iranian supplies, “which also come with more lucrative financial terms. Trade negotiations already underway between the US and China may also play a role.”
Crude-oil prices are likely to stay higher through the summer, O’Neill said, and he expects WTI crude oil prices to rise to $70 or higher because of the Iran sanctions and the general lower global oil supplies.
“Prices will stay firm all summer. I don’t expect a setback. There’s definitely going to be concerns for a while, and that’s going to drive prices higher,” he said.
Hatfield says gasoline demand this summer could be strong because a good economy could encourage more vacation trips, even with higher prices.
Trump could tap the Strategic Petroleum Reserve if gasoline prices rise too much, Croft said, but there are limits.
“All these interconnected geopolitical stories are affording almost no room for error if Trump hopes to achieve his central goal of keeping oil prices in check,” she said.