Crude oil prices surged on Monday, finishing the session at their highest levels this year after the Trump administration revoked waivers meant to facilitate the free flow of Iranian oil to U.S. allies.
On Monday, the U.S. moved to block eight major crude consumers, including India and China, from importing crude from Iran, which pumps nearly 4 million barrels per day (bpd).
The decision, announced on Monday by Secretary of State Mike Pompeo, is designed to completely close the spigot on Iranian oil. However, the practical effect tightening the screws on a beleaguered Iranian economy— and removes needed supply from global oil markets, where prices have been spiking recently.
The move spurred both Brent (^BZM) and U.S. crude (^CLF) prices to their highest peaks since at least late October. Brent settled more than 3% higher at 74.15, while West Texas Intermediate spiked by over 2% to $65.66.
The Trump administration has indicated that Saudi Arabia and the United Arab Emirates are committed to pumping enough crude to slake demand.
However, some observers fear a protracted period of sanctions could cause energy prices to spike higher, which could also push up gas prices ahead of the summer driving season.
“China has already indicated its opposition to the US implementation of unilateral sanctions, so it is probably unlikely to see Iranian exports to fall to zero,” said Giovanni Staunovo, an analyst at UBS.
With other major oil importers like South Korea, Japan and India likely to comply, Iran’s oil exports are likely to plummet, Staunovo wrote in a note. He added that seasonal demand will tighten the market further, pushing Brent further into its current $70-80 per barrel range.
OPEC wild card
A wild card remains a recent deal among OPEC’s oil-producing powerhouses to cut global production.
The loss of Iranian supply, in theory, may be counterbalanced by the Saudis and the UAE — but the margin of error is lower because of disruptions in other oil producing nations.
“Thanks to over-compliance to the production cut deal, the Saudis and its allies still have buffers to offset a decline in Iranian exports,” UBS’s Staunovo wrote.
“As such, we expect the OPEC+ compliance rate to decline again from May onwards. However, amid seasonally higher oil demand into the summer, the oil market is likely to be very sensitive to any further disruptions in Libya, Venezuela or Nigeria.”
Henry Rome, a macro analyst at Eurasia Group, estimates that there is enough spare capacity to cover the lost Iranian oil supply in the near term. The combined excess production from key Gulf allies can balance out the lost crude from Iran, he added.
“While there will be volatility in the near term, we do not think that today’s announcement will structurally drive a sustained or significant spike in oil prices,” Rome said.
“Throughout 2019, the picture improves, as Saudi Arabia can bring online additional capacity and US production increases steadily, covering Iranian losses and leaving about 1.5 million bpd of spare capacity,” the analyst added.
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