Oil Prices Plummeting in Spite of Sanctions on Iran

Speculation without a cause meets overproduction 

When the full effect of post-JCPOA (aka Iran nuclear deal) sanctions hit Iran earlier this month, it was widely expected that the price of oil that had been generally increasingly throughout the year would continue its upward spiral. In reality, the opposite has happened as November has seen a sharp decline in the price of oil. At present, the prince of West Texas Crude is lower than at any time since late 2017 with one barrel standing at $50.42.

While it is still far too early to ascertain the full effect of new US sanctions on Iran’s domestic economy, it can now be said that the panic over how sanctions would impact the global prince of oil was little more than “speculation without a cause”. The horror stories of Iranian ships blocking GCC oil from exiting the Strait of Hormuz turned out to be giant bluffs as any rational geopolitical expert could have forewarned. In reality, Iran was not about to start a war over the kinds of sanctions it had faced in the fairly recent past and ultimately survived – not least because its Russian and Chinese partners would have totally opposed such a move and had even hinted at their displeasure with the dramatic threats made by Iran to this effect earlier in 2018.

Furthermore, with some of Iran’s major energy customers receiving so-called “sanctions waivers” from Washington, the impact of Iranian energy being effectively removed from the market due to customers being threatened by so-called third party sanctions has been significantly minimised. Turkey, South Korea, Japan, India, Greece and Italy all received waivers from Washington, thus allowing them to continue to buy Iranian oil while Russia and China continue to transact with Iran in any case as was always expected to be the case.

At the same time, the United States has been producing ever more oil – up to 11 million per pay while American pressure on Saudi Arabia to increase production has become all the more effective in the wake of the Jamal Khashoggi murder. At the same time, Russia had previously upped production in-line with the OPEC+ format which collectively has led to there being plenty of oil in November. In this sense, panic over possible winter oil shortages has if anything led to simultaneous over production from the energy powerhouses of the United States, Russia and Saudi Arabia.

The China factor 

At the same time, Chinese consumption is down. In many respects this is the most misunderstood factor behind the recent dip in oil prices. Contrary to the aspirations of Donald Trump, China’s economy continued to grow throughout 2018 while its exports to the United States in the first three quarters of the year increased over figures from 2017.

China’s modest decline in oil consumption is real, but it is not motivated by economic insecurity. Instead it is motivated by the fact that as China continues to grow it seeks to rapidly ween itself off of the oil consumption as much as possible.

While the coming decades will surely see the building of new Chinese cities and infrastructural mega-projects, one should not immediately expect these to be totally fuelled by oil or other fossil fuels. As part of China’s drive to become both more energy independent and less polluted, Chinese innovators have created some of the most efficient green technologies the world has ever known. With China already working to power Africa’s forthcoming industrial revolution with green technology – Beijing looks to create new industrial models that are certainly not 100% oil free but which rely on oil far less than 20th century models of industrialisation.

What it means for Iran 

The business Iran is already losing from its compromised European partners who have shown themselves to be afraid of falling foul of US sanctions may well have been at least partly compensated if energy prices were to rise – assuming that enough nations that are regular customers of Iranian energy either received sanctions waivers from Washington or otherwise simply continued to trade with Iran in spite of US threats. Now though, Iran is potentially facing the worst of both worlds as the non-energy sector is being hit by the threat of US sanctions on Iran’s European and other international partners while the price of oil is not high enough to make up for this even among the countries that are still happily buying Iranian energy.

The Trump factor

In this sense, at least at this early stage of the sanctions game, Trump is the winner for three important reasons:

–oil prices are down which is something that is typically a major issue for oil and petrol hungry US consumers 

–Iran is now in a lose-lose position having lost some of its European partners to American threats but without having the ability to sell energy in order to make up for the difference owning to plummeting oil prices. This may be a temporary situation but it is the present reality nevertheless

–Saudi Arabia and consequently OPEC is largely beholden to Trump because he openly rebuffed pressure to turn on his allies in Riyadh. Clearly, Saudi Arabia will now produce as much oil as Trump demands as a means of thanking him for resisting the pressures to call for the removal of top Saudi officials in teh aftermath of the Khashoggi murder

In classic Trump style he has taken credit for the low oil prices but this time he is actually speaking the truth to a large extent.

Conclusion

The pre-November/pre-sanctions panic in the oil markets ended up scoring an own goal as the drive among multiple oil producers to up production has resulted in a near surplus that has forced the price of oil drastically down. With the situation in the Middle East comparatively stabilised compared to realities earlier this year, it is likely that prices will remain relatively low until at least the beginning of 2019. Should Venezuela and China begin to work on the modernisation of the South American country’s drilling facilities in earnest after the turn of 2019, the trend might last even longer.

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