Time to live without Iran's oil
Dubai - Oil hits 2019 high on U.S. plan to tighten squeeze on Iran.
Oil rallied more than three per cent on Monday after the US President Donald Trump decided not to extend waivers next month for major oil importers of Iranian oil, hence, opening doors to further upside in crude prices in coming months.
Washington had granted waiver to eight countries - India, China, Japan, South Korea, Taiwan, Turkey, Italy and Greece - last year, allowing them to import oil without imposing sanctions.
The White House on Monday evening confirmed that the US president had decided not to reissue waivers in May allowing importers to buy Iranian oil without facing US sanctions. The US, Saudi Arabia and the UAE "have agreed to take timely action to assure that global demand is met as all Iranian oil is removed from the market," the White House said.
Washington DC had earlier allowed these eight countries to continue making limited purchases from India for a period of six month.
China and India are currently the largest importers of Iranian oil. While South Korea and Japan are relatively less dependent on Iranian oil and have already been treading lightly.
Washington Post had earlier reported that the buyers of Iranian oil need to end imports soon or face US sanctions.
On Monday, Brent jumped 3.3 per cent to $74.31 a barrel, the highest since November 1, 2018. It was up $2.18 at $73.97 at 1415GMT. US West Texas Intermediate crude climbed by as much as 2.9 per cent to $65.87, the highest since October 31, and was last up $1.62 at $65.62. Brent has gained nearly 38 per cent year-to-date, rising from $53.8 at the beginning of this year to $74.3 on Monday.
"This does bring a lot more uncertainty in terms of global supplies," said Olivier Jakob, analyst at Petromatrix. "It is a bullish surprise for the market."
Lukman Otunuga, research analyst at FXTM, said Monday's sharp appreciation has not only opened doors to further upside but confirmed how oil markets remain highly sensitive to fears of possible supply-side shocks.
"With Opec-led supply cuts, geopolitical tensions in Libya and possible sanctions on Venezuela stimulating concerns over further supply disruptions, the near-term outlook for oil points to further upside. However, with many uncertainties surrounding oil markets in the form of Donald Trump, global growth concerns and US-China trade developments, the longer outlook remains open to question," said Otunuga.
Saudi Arabia on Monday affirmed that it would compensate for any shortfall due to Iranian issue in order to balance the oil market.
"Saudi Arabia will coordinate with fellow oil producers to ensure adequate supplies are available to consumers while ensuring the global oil market does not go out of balance", said Khalid Al Falih, Energy Minister of Saudi Arabia.
Otunuga said there is speculation over the Trump administration increasing the pressure on Opec to boost production in an effort to cover up the deficit.
"While Saudi Arabia could make a move to plug the hole created from the US ending exemptions on Iran sanctions, more clarity is likely to be provided in June when Opec and non-Opec meet in Vienna," Otunuga added.
Edward Bell, commodities analyst, Emirates NBD Research, said outlook for crude oil production in the Middle East and North Africa over the next few months will largely be set by US sanctions policy on Iran.
"US sanctions on trading in Iranian crude went into effect in November last year although their impact on oil market balances was neutralised to a degree as the US government offered waivers to importers. Those waivers are due for expiry in May and if sanctions are enforced in full then crude markets will likely tighten considerably over the next few months," Bell said in a note released on Monday.
Iran's output is down more than 1 million barrels a day since May 2018 and hit a low of around 2.75 million barrels per day as of March 2019.
As a results of full US sanctions, Iranian production will likely to decline by at least another 200,000 barrels a day by the end of the year and exports will also push lower.
"In public statements the US administration is targeting zero Iranian exports: cutting 1.3 million barrels per day from global markets without any offsetting would help send oil prices sharply higher," he added.
The US is aiming for zero Iranian oil exports as quickly as possible in order to put further pressure on Tehran.