Oil: Trump Iran sanctions could cause prices to soar to $100 a barrel

Raheb Homavandi/Reuters

• The State Department has ordered buyers to cut oil
  imports from Iran by November 4.
• Against a backdrop of falling output from other key OPEC
  countries, analysts say barrels could hit $100.
• 
  Watch
  oil trade in real time here.
  

Less than a month before another round of US sanctions against
Iran take effect, analysts say hundred-dollar oil could be on the
horizon. 

The Trump administration has
called on buyers to cut off oil imports from
Iran in efforts to pressure the third-largest OPEC
producer to change its behavior, a move that
could squeeze global supply and pressure
prices that are already at four-year highs. Brent,
the international benchmark, is currently trading around $85 a
barrel. 

“Higher oil prices seem inevitable and, in our view, $100 per
barrel is easily within reach,” economists from Bank of America
Merrill Lynch wrote in a recent research note, citing a looming
dropoff in Iranian production.

Iran’s crude exports have fallen more than expected ahead of the
sanctions, even as the Islamic Republic offers Asian customers
the cheapest prices in more than a decade versus Saudi
grade. According to tanker data
compiled by Bloomberg, shipments dropped by just over a
quarter million barrels per day in September to their lowest
level since 2016. 

In hopes of preventing Tehran from moving forward with its
nuclear program, European officials have been working to protect
Iranian oil sales from US sanctions. But the Trump administration
has portrayed those efforts as implausible, threatening to
penalize companies that try to circumvent its
policy. 

“The European Union is strong on rhetoric and weak on
follow-through,” John Bolton, the national security adviser,

said in a conference speech last month. “We do not intend to
allow our sanctions to be evaded by Europe or anybody else.”

President Donald Trump has looked to other oil producers to
pick up the slack ahead of midterm elections, but output
disruptions in key OPEC countries present
limits. Helima Croft, a former CIA analyst who is now
head of commodities research at RBC, said plummeting production
in Venezuela and Angola leaves little room to balance other
supply risks in Libya, Nigeria and Iraq. 

“The countries that can increase are very small in number,”
she said, adding that there are questions about how long Russia
can keep
raising output. “It’s really only Saudi Arabia at this
point.” 

Following requests from the White House, Riyadh said
earlier this year it could increase output by a “measurable
amount
.” While Saudi Arabia accounts for the lion’s
share of OPEC production, some analysts are skeptical it has
enough spare capacity to fill the gap while maintaining adequate
reserves. 

Trump has repeatedly taken aim at OPEC for rising energy
prices, even after it came to a rare agreement to ease
production restrictions in June. The 15-member group has been
coordinating output levels since 2016 in efforts to tackle a
global oil glut.

“We protect the countries of the Middle East, they would not be
safe for very long without us, and yet they continue to push for
higher and higher oil prices!” the president said in a recent

tweet. “We will remember. The OPEC monopoly must get prices
down now!”

That strategy may have encouraged member countries to
increase production in the past, Croft said, but will likely
become less effective as the global oil cushion shrinks. Output
from the 12 countries bound by the supply-cutting agreement
actually fell by 70,000 barrels per day in September, a
Reuters survey found. 

“With Trump and these tweets, I think there are diminishing
returns,” she said. “In terms of going forward, we’re looking at
an ever-shrinking pool of OPEC barrels. You can yell at them. But
if they don’t have the barrels, they don’t have the barrels.”

While the administration has said it may grant sanction
waivers to avoid supply shocks, a tactic used in the Obama era,
it has still maintained an objective of sending Iranian oil
exports to zero. The White House did not respond to an email
requesting comment.

At $100 a barrel, the Bank of America economists said oil
costs would dampen consumer demand not only for gasoline but also
for other goods and services. T
hat level of energy
prices is expected to shave two basis points from global growth
in 2019. 

“This is not a major impact, but it isn’t trivial either,”
they said. “Moreover, with oil supplies so tight any further
disruption could mean a major spike in oil prices, creating more
nonlinear impacts on confidence and growth.”

On Monday, the International Monetary Fund lowered its
global economic growth forecast for this year and next. The
international lender cited in its
report “rising trade barriers and a reversal of capital flows
to emerging market economies with weaker fundamentals, and higher
political risk.”

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