The US will end Iranian crude oil import exemption and increase geopolitical risks
U.S. Secretary of State Pompeo will announce that he will no longer exempt any country from the current Iranian crude oil import ban, which will take effect on May 2. The suspension of shipments by Indian refineries in May indicates that India, one of the main buyers of Iranian crude oil, has also begun to take the initiative to circumvent Iranian crude oil. In view of the fact that the United States listed the Iranian Revolutionary Guard as a terrorist organization and Iran threatened to restart the uranium enrichment centrifuge, the previous escalation of sanctions by the United States would be a shock blow to Iran and further intensify the contradiction between the two countries. Iran may take some extreme Countermeasures in the future, not excluding the possibility of a hot war.
Short-term Solution of Global Heavy Oil Supply Gap
Globally, Saudi Arabia has the potential to substantially increase production in a short period of time, so whether Saudi Arabia’s output policy will adjust to the demands of the United States next will be crucial. The current situation is very similar to that in May last year, but after the roller coaster of oil prices last year, even if Saudi Arabia is likely to ease production cuts due to the escalation of sanctions imposed by the United States in the future, its policy adjustment will probably lag behind in order to avoid repeating the same mistakes.
We believe that the shock sanctions imposed by the United States on Iran will intensify the contradiction between the two countries, and that the geopolitical risk in the Middle East will rise further in the future. Next, the market will pay more attention to the trend of Saudi Arabia’s production policy. We believe that after the sharp fall in oil prices in the last four quarters, Saudi Arabia will be more cautious in adjusting its production policy, which means that Saudi Arabia is less likely to release its supply substantially to the market in the short term. In the context of the sharp decline in the scale of global refinery overhaul, the global crude oil supply gap is expanding. We believe that the overall trend of oil prices will be maintained in the future, and Brent is expected to hit the top $85 per barrel.
OPEC will release production substantially in the short term, or global demand will shrink sharply.
1. The United States will end Iranian crude oil import exemption and increase geopolitical risks
According to the Washington Post, U.S. Secretary of State Pompeo will announce that he will no longer exempt any country from the current Iranian crude oil import ban, which will take effect on May 2. Boosted by news, international oil prices rose rapidly, with Brent breaking through $73 a barrel.
This year, against the backdrop of OPEC production cuts, Venezuela’s sanctioned output declines, and Libya’s chaotic situation escalating, the global supply of heavy oil has been tight, and it is obvious that the recovery of exemptions by the United States at this time further exacerbates the upward risk of oil prices. Iran’s crude oil exports have fallen to less than 1 million barrels a day since April. India and China remain relatively stable imports of Iranian crude oil. But just last week, India’s four major refineries announced a moratorium on Iranian shipments in May and turned to Mexico, the United States and OPEC, indicating that India, one of Iran’s main crude oil buyers, has also begun to circumvent Iran. Oil, which also means that even if Iran may maintain certain exports through some abnormal means in the future, it will be difficult to reverse the trend of a sharp decline in future crude oil exports. At present, Iran has not made any comment on the U.S. ruling, but in view of the previous U.S. listing the Iranian Revolutionary Guard as a terrorist organization and Iran’s threat to restart uranium enrichment centrifuges, the escalation of U.S. sanctions will shock Iran and further intensify the contradiction between the two countries, Iran may take extreme Countermeasures in the future, not excluding the emergence of such measures. The possibility of a hot war.
2. Global Heavy Oil Supply Short-term Difficulty
In a Washington Post report, Mepperpeo plans to announce increases in production promises from Saudi Arabia and other oil-producing countries, such as the United Arab Emirates, to make up for the shortfall in Iranian crude oil in order to mitigate the risk of a sharp rise in oil prices. Globally, Saudi Arabia has the potential to substantially increase production in a short period of time, so whether Saudi Arabia’s output policy will adjust to the demands of the United States next will be crucial. The current situation is very similar to that in May last year, when the United States announced its withdrawal from the Iranian nuclear agreement, Saudi Arabia eased production cuts at the OPEC mid-year meeting in June, releasing large quantities of supplies to the market, causing oil prices to collapse in the fourth quarter. We think that after last year’s roller coaster oil prices, Saudi Arabia will be very cautious in adjusting its production policy. After all, after the oil price crash, Saudi Arabia has to reduce its production excessively to reverse the decline of oil prices. Even if Saudi Arabia is likely to ease production cuts in the future due to the escalation of sanctions imposed by the United States, its policy adjustment is likely to lag behind in order to avoid repeating the same mistakes.
In addition, the scale of global refinery overhaul in the second quarter will drop dramatically compared with that in the first quarter. After centralized overhaul in the first quarter, the global cracking price gap has been significantly repaired, which will lay the foundation for improving the start-up rate of refineries in the second quarter. According to Energy Aspects statistics, the scale of global refinery overhaul after May will decrease by 2.5 million barrels/day compared with that in the first quarter, and the increase of the start-up rate of refineries will drive the original one. With the recovery of oil processing capacity and the continued decline of supply in Iran and Venezuela, the global crude oil supply and demand gap will also intensify.
3. Investment proposals
We believe that the shock sanctions imposed by the United States on Iran will intensify the contradiction between the two countries, and that the geopolitical risk in the Middle East will rise further in the future, which does not exclude the possibility of a hot war. Globally, Saudi Arabia is the main supplier of Iran’s crude oil shortfall in a short time, but we believe that after the sharp fall in oil prices in the fourth quarter of last year, Saudi Arabia will be more cautious in adjusting its production policy, which means that Saudi Arabia is less likely to release its supply substantially to the market in the short term. In the context of the dramatic decline in the scale of global refinery overhaul, global crude oil The supply gap is widening. Therefore, we believe that oil prices will continue to go up as a whole in the future. Brent is expected to hit the top of $85 per barrel.
4. Risk cues
OPEC will release production substantially in the short term, or global demand will shrink sharply.
Geographical risk is heating up again
U.S. oil distribution soared nearly 3% to a new year high
U.S. WTI June crude oil futures electronic disk closed Monday (April 22) up $1.61, or 2.51%, to $65.68 a barrel. Oil prices jumped nearly 3% on Monday to a six-month high as concerns about global supply constraints intensified after the United States announced further pressure on Iranian oil exports.
Meanwhile, ICE Brent crude oil futures closed up $2.16, or 3.0%, at $74.13 a barrel in June.
Increased U.S. sanctions on Iran are worrying about crude oil supply
The United States said it would lift its exemption from May 2 for eight economies to buy Iranian oil without sanctions from the United States.
Oil prices hit a new high in 2019 for the first time after the Washington Post reported on the Trump Administration’s new policies.
Michael Bradley, strategist at Tudor Pickering Holt, an investment bank, points out that this unexpected move is driving up oil prices. He said in a research report that crude oil investors were surprised today because the Trump administration said it would not extend the exemption clause allowing any country to buy Iranian oil without facing U.S. sanctions. Many expect the United States to take stronger action on exemptions, but most did not expect to announce zero exemptions.
Last November, after President Trump unilaterally withdrew from Iran’s nuclear agreement with world powers in 2015, the United States imposed sanctions again on Iranian oil exports. However, the U.S. government granted Iran’s eight largest oil buyers immunity, allowing them to make limited purchases within six months.
The eight buyers are China and India, Iran’s largest customers, and Japan, South Korea, Turkey, Italy, Greece and Taiwan, China. The exemption allowed Iran to continue exporting about 1 million barrels of oil a day, down from about 2.5 million barrels a day last year.
Does OPEC continue to reduce production will affect oil prices?
After months of saudi-dominated production cuts, supply in the oil market is declining rapidly. OPEC and other oil producers, including Russia, are taking the lead in reducing production by 1.2 million barrels a day.
John Kilduff, founding partner of Again Capital, an energy hedge fund, said Monday that geopolitical risk premiums have largely returned to the oil market. If not all, most legitimate businesses will avoid buying Iranian oil. Iran’s oil supply will be reduced to a trickle.
After crude oil prices plunged in the last few months of 2018, Brent’s crude oil price rose 38% this year, and U.S. crude oil prices rose nearly 45%.
The White House said in a statement that the United States will work with OPEC member Saudi Arabia and the United Arab Emirates to take timely action to ensure that global demand is met as Iranian oil withdraws from the market.
Saudi energy minister Falh said Saudi Arabia would coordinate with other oil producers to ensure that consumers had adequate supplies and that the global oil market was not imbalanced.
In the coming weeks, Saudi Arabia will consult closely with other oil-producing countries and major oil-consuming countries to ensure a balanced and stable oil market, which is conducive to both oil-producing and consumer countries and to the stability of the world economy.
OPEC and its allies are scheduled to meet at the end of June to decide whether to raise the production ceiling or continue to curb production.
Daryl Liew, head of portfolio management at Reyl Singapore, a financial services company, said India could be hit hardest by U.S. policy among Iranian oil buyers. Daryl believes that India may be one of the major potential countries to be affected by rising oil prices in terms of its current account deficit. This will also essentially put pressure on inflationary pressures.
The unrest in Libya will continue to affect oil prices
Meanwhile, Tripoli, the capital of Libya, OPEC’s main oil producer, suffered a series of air strikes and explosions last weekend, escalating violence that could further threaten oil supplies. Libya is in the midst of a full-scale civil war.
Wu Kang, head of Asia analysis at Prussian Energy, said the situation in Libya could lead to a rapid decline in oil production. Libya produces 1.1 million barrels of oil a day. If problems arise, 300,000 to 400,000 barrels of oil a day may be immediately affected.
Wu adds that much depends on how Saudi Arabia will cope with this situation – they have excess capacity – but supply concerns will put pressure on oil prices in the short term.