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Sanctions on Iran have come into force and a major oil supply source is therefore expected to be off the market. Fears of this event have been bolstering oil prices for the past many months, and now that the day is here, it may be worthwhile to look at where oil is headed given the latest developments affecting this volatile commodity.
Judging by last Friday, when benchmark U.S. crude jumped 9.4 percent, and Brent crude, which helps set the price of imported oil, rose 7 percent in London, the worst fears appear to have come true. Shares of major oil companies spurted in tandem – BP plc (NYSE:BP) +4.7 percent, Apache Corporation (NYSE:APA) +2.3 percent, Exxon Mobil Corporation (NYSE:XOM) +2.2 percent and Chevron Corporation (NYSE:CVX) +1.4 percent. Investors are expecting oil prices to increase, and for the above companies to profit off the higher prices.
The jump is obviously predicated on the twin events of the favorable outcome of the European Union summit, and, of course, the Iran sanctions. Indeed, Farouk al-Zanki, Chief Executive Officer of Kuwait Petroleum Corp., is cited by the Kuwaiti Al-Rai as saying that the sanctions could help drive up oil prices into the $90-$100 range. Worse, the sanctions come at a time when Norway’s Statoil ASA (NYSE:STO) has suspended production at a platform in the North Sea due to a tanker leak. Statoil ASA (NYSE:STO) is already reeling from a likely production loss of 10 percent after oil workers went on strike at four of its North Sea fields.
These are real causes of concern – but what is the reality?
There are some equally powerful arguments against a sustained price rise. Perhaps the most important is that of supply by OPEC. According to reports Iran requested OPEC to convene a meeting to address the problem of production of crude in excess of the group’s targeted 30 million barrels per day (bpd), a factor that is expected to negatively impact oil prices.
According to a Reuter’s survey, reported in the Gulf Daily News, in June OPEC production remained near its highest since 2008, primarily due to higher supplies from Saudi Arabia and Iraq. OPEC production came in at 31.63 million bpd against the aforesaid ceiling of 30 million bpd. “I don’t see Saudi Arabia cutting production by very much until the Iranian embargo situation is clarified and because of concern about global economic growth,” said Paul Tossetti, senior energy adviser at PFC Energy, as quoted by Gulf Daily News.
Moreover, a stagnating economy across Europe, and China’s slowing manufacturing growth are also likely to have a softening impact on demand.
These factors may effectively blunt the impact of the sanctions and the rise in price of oil may be more tempered than previously thought. Suzanne Maloney, a senior fellow at the Brookings Institution’s Saban Center for Middle East Policy is quoted in an article in Reuters as saying: “Thanks to Saudi production increases and the slump in Europe, it appears that we can have our cake and eat it too,” she said. “We can exact a painful price on Tehran for its recalcitrance and avoid any blowback to our own economy, at least in the near term.”