Possible temporary oil price leaps

27 september 2018 | Rossiyskaya Gazeta

Oil prices have crept up to a four-year high due to the decision of the OPEC+ countries not to increase production, as well as fears related to the US sanctions against Iran and problems with mining in Venezuela.

Alexander Kurdin
Alexander Kurdin
Department for Fuel and Energy Sector

 "The sanctions against the export of Iranian oil will come into force in November, and as long as the period of adaptation lasts, temporary oil price will possibly leap from USD 90 to USD 100 per barrel," said Alexander Kurdin, Manager for Research in the Fuel and Energy Sector of the Analytical Center, to Rossiyskaya Gazeta. He states that the situation should clear up by the beginning of 2019. "Importers will understand the scale of the restructuring of supplies. It is likely that additional sources will be found, and prices will remain within the moderately high levels of USD 70-80 per barrel," the expert explained.

In particular, the European Union has a special blocking regulation, which in theory should protect the European companies from sanctions and help to preserve supplies from Iran. Although in practice, its large-scale use is not very likely, Mr. Kurdin said. "The participants in the nuclear deal said they planned to create a special mechanism for settlements with Iran to preserve the opportunity to trade with it after the restoration of the US sanctions. Japan has traditionally tried to mitigate sanctions on oil supplies since it is especially dependent on imports. Moreover, large developing importers, such as India, will search for "roundabout" ways", the expert believes.

The publication notes that the "mild" version of the sanctions implies that the market can lose 0.5-1 million barrels a day, which would not affect the balance. The "rigid" version implies about 1-1.5 million barrels a day before the end of the year, roughly the same as during the general anti-Iran sanctions five years ago. So far, this latter option is considered as more probable. In this case, there may be a deficit of 1 million barrels a day in the market next year and even at the end of this year, unless, of course, other players actively compensate for the dropout. OPEC+ countries have not announced this yet, but a regular meeting of OPEC will take place in early December, and then the most important decisions must be made. In addition, since OPEC and its agreement partners formally proceed from 100% performance of the total production quota, they can substitute de facto their own supplies for the disposal of Iranian oil, and hardly anyone will protest, except, of course, Iran itself.

"The anticipated price increase may become an additional incentive for oil producers from countries not included in the OPEC+ agreement, primarily from North America—they will balance the situation," Mr. Kurdin predicts.