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Iran Sanctions Unlikely to Boost Oil ETFs in 2019?

Sanghamitra Saha
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The United States formally levied tough sanctions on Iran from Nov 5. The United States’ sanctions against Iran were first put into place in August. That sanctions were on cars, metals and minerals as well as U.S. and European aircraft.

The second part of the sanctions that bans import of Iranian energy was enacted starting Nov 5. These sanctions are part of President Donald Trump’s initiative to put an embargo on Iran’s missile and nuclear programs and diminish its influence in the Middle East, per CNBC.

However, Washington has also offered temporary waivers to eight key buyers, China, India, Greece, Italy, Taiwan, Japan, Turkey and South Korea, allowing them to continue to import oil from Iran. This in turn kept oil market steady. Iran’s oil exports were 1.7 million barrels per day in October, per oilprice.com (read: Oil ETFs: What You Need to Know).

But Goldman Sachs revealed in a research note that “as more Iranian supply goes offline, the market will continue to tighten. Iran could lose nearly 600,000 bpd of exports by the end of the year, relative to October levels.” So, Goldman expects the oil market to record deficit in the fourth quarter of this year, as quoted on oilprice.com.

Against this backdrop, along with many analysts we believe that oil prices may not shoot up in 2019. We’ll tell you why.

U.S., Russia & Saudi to Scale Up Supplies

As soon as Iranian output is out of the market, high chances are that key producers like Saudi Arabia and Russia will start pumping more. The United States and Russia have both scaled up production to a record level of about 11.3 million barrels a day, while members of the Organization of the Petroleum Exporting Countries (OPEC) boosted production to the highest levels in two years despite drop-offs in Venezuela and Iran.

The trio – Russia, the United States and Saudi Arabia – increased output above 33 million bpd for the first time in October, up 10 million bpd since 2010  (read: 3 Country ETFs That Are Beneficiary of Higher Oil Prices).

Iranian Supplies to Phase Out Slower Than Expected?

Investors should note that following the sanctions, there were not much changes in the market sentiments. This was because of the fact that Iranian oil exports plunged to around 1.3 million barrels a day from 2.4 million last spring, as customers resorted to other suppliers in expectation of the sanctions, nytimes.com.  Though the sanctions are likely to cut about 2% of global oil supplies, administration’s waivers hinted at a patient approach by Washington toward European and Asian customers so that they could find other suppliers.

Dwindling Demand?

Moreover, economic growth in China is slowing down. It recorded the lowest year-over-year growth rate in the third quarter of 2018 since the first quarter of 2009. The situation in the Eurozone in Q3 was the same, marking the feeblest growth rate since the second quarter of 2014. Such dwindling growth profile points at weaker demand.

What’s in Store for 2019?

Goldman expects backwardation in the oil market. It expects Brent to trade around $80 per barrel by the end of the year and slip to $65 per barrel by the end of 2019 as midstream Permian constraints are likely to be relieved.

ETFs in Focus

Against this backdrop, investors should keep a track of oil ETFs in the coming days. These funds include the likes of United States Oil Fund USO, Invesco DB Oil Fund DBO, ProShares Ultra Bloomberg Crude Oil UCO and United States 12 Month Oil Fund USL.

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US-12 MONTH OIL (USL): ETF Research Reports
 
PRO-ULT BB CRUD (UCO): ETF Research Reports
 
US-OIL FUND LP (USO): ETF Research Reports
 
PWRSH-DB OIL FD (DBO): ETF Research Reports
 
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