Crude Oil: Iran continues to dominate the headlines, keeping WTI above $71 per barrel and Brent at $77 per barrel as of early trading on Friday. The exchange of airstrikes between Iran and Israel is also adding to the tension. Meanwhile, aside from the huge increase in U.S. oil production, the EIA reported some bullish figures this week – a decline in both crude oil and gasoline inventories by more than expected.
OPEC sees Iranian outage as not immediate. Any loss of supply from Iran due to U.S. sanctions will take time, and OPEC won’t rush to increase output in the interim, sources told Reuters. The steep losses from Venezuela combined with the potential disruption in Iran could force OPEC to adjust production levels earlier than it had expected. But because U.S. sanctions don’t really take effect until November, OPEC is not scrambling just yet. “I think we have 180 days before any supply impact,” an OPEC source said. They will meet in Vienna in a month to evaluate the current status of the oil market and the production limits.
Short-term supply glut eases Iran fears Although supply outages from Iran could severely tighten the oil market, Bloomberg reports that there is currently a bit of a supply glut, which should prevent a sudden price spike. Oil traders have reported unsold cargoes in north-west Europe, the Mediterranean, China and West Africa. The sudden emergence of a temporary glut is reflected in the Brent timespreads, with the July-August spread falling from 63 cents per barrel last month to just 24 cents per barrel this week, a five-month low. The narrowing of the spread is a “sure sign of an oversupplied market,” Bloomberg reports. However, timespreads further out are widening, a sign that the market expects things to tighten up towards the end of the year.
China is the largest single buyer of oil from Iran at about 700,000 bpd. South Korea comes in second at a little over 250,000 bpd. The Trump administration’s plan of squeezing Iran hinges on the decisions made by these buyers. They have until November to reduce their purchases, although the U.S. Treasury told them to begin immediately. Still, it will be tough for U.S. diplomats to convince them. A spokesperson from the Chinese Foreign Ministry said that “normal, transparent and pragmatic cooperation with Iran” would continue.
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