Analysts say any moves to compensate for loss of output from Iran will be seen as indirect attack on Tehran
Washington is counting on Middle East allies to help prevent its sanctions on Iran’s oil exports from sending oil prices skyrocketing, but analysts warn that this could further destabilize the already precarious balance within OPEC.
The U.S. re-imposed sanctions on Iran—including its crude exports—following President Donald Trump’s withdrawal one year ago from a multinational accord under which Tehran had drastically scaled back its nuclear activities.
Trump has since repeatedly urged the Organization of the Petroleum Exporting Countries to boost oil supplies to keep a lid on prices. However while OPEC may now need to compensate for the loss of output from Iran, a founding member of the cartel, such a move could spell disaster for the organization.
“If [OPEC kingpin] Saudi Arabia is helping the U.S. out, it’s like Saudi Arabia attacking Iran indirectly,” said Bjarne Schieldrop, an analyst at Swedish bank SEB. Tensions will likely be high at the next OPEC meeting at the end of June in Vienna.
“It could be the end of OPEC as we know it, who knows,” Schieldrop told AFP.
Iran, OPEC’s most influential member behind Saudi Arabia, traditionally favors lower collective output to boost crude prices and protect precious revenues.
Ahead of Trump re-imposing the sanctions in November, Saudi Arabia and fellow OPEC member the United Arab Emirates (U.A.E.) sought to compensate for an anticipated sharp drop in Iranian crude. However Trump also gave six-month exemptions for eight countries—China, Greece, India, Italy, Japan, South Korea, Taiwan and Turkey—to continue purchasing Iranian crude.
As a result, OPEC oil output rose in the fourth quarter of 2018—without any real need to do so—taking Saudi Arabia by surprise and leading to prices dropping.
“The Saudis have been burned by last year’s surprise decision to issue waivers—when OPEC core members such as the U.A.E. and Saudi had already been boosting output to pre-empt the impact of Iran sanctions on the market,” said analyst Riccardo Fabiani at research consultancy Energy Aspects. “That situation embarrassed them.”
To combat falling prices, OPEC members agreed with allies including Russia in December to trim production. This resulted in prices rising steadily at the start of the year, until they were sent hurtling to six-months highs when the U.S. announced on April 22 that the waivers would end on May 2.
Riyadh is now expected to wait until the dust settles before altering output again.
“This time, the Saudis and the U.A.E. will wait to see the effects of the end of the waivers on the market before gradually increasing production,” said Fabiani. “Their reaction will be much more cautious,” he concluded.
Washington’s Middle East strategy has meanwhile been emboldened by a surge in its own domestic shale oil output. “The dramatic change is the fact the U.S. are independent of oil imports,” Schieldrop said. “The implication is that U.S. can more or less do what it wants in the Middle East.”
However, Fabiani was quick to point out that U.S. oil supplies were not sufficient to offset Iran’s sanctions-hit crude. “The U.S. alone cannot simply replace lost Iranian volumes, particularly in a context of OPEC production cuts,” he told AFP. “Second, there is a quality mismatch. Additional U.S. crude tends to be light and sweet; Iranian crude is heavy and sour. They are not like for like, from a refiner’s point of view.”
Heavy and sour crude is more expensive to refine than light and sweet crude.