Oil market sees US sanctions on Iran a possibility


Oil prices are under both push and pull factors as the market anticipates the possible return of US sanctions on Iran, while US shale drillers ramp up production.

The appointment of John Bolton (picture) as national security advisor by US President Donald Trump last week raises fears the country may re-impose trade sanctions on Iran, which could pull out some 400,000 to 500,000 barrels of oil daily from Iran.

Energy markets have pushed oil prices to above US$70 (RM271.60) per barrel mark on the Brent index, which in turn could entice US drillers and producers outside the OPEC and non-OPEC umbrella to increase production.

“The market is pricing in the possibility (of US-led sanctions on Iran) and it would be one of the most significant catalysts for upward momentum in crude prices,” Oanda Corp head of trading for Asia Pacific Stephen Innes told The Malaysian Reserve.

“The impact, in my view, could be somewhat limited as the US$70 per barrel level is when US shale producers tend to ramp up production.”

He added that Russia will be looking for a way out of its deal with OPEC on production curbs and look to capitalise on the higher oil price environment.

Russia joined OPEC and non-OPEC agreement to collectively cut oil production by close to 1.8 million barrels per day to clear excess oil in the market. It limited its daily production to 10.98 million barrels of oil in 2017.

“Geopolitical focus can undoubtedly give way quickly to the big elephant in the room, which is shale oil production,” Innes said.

MIDF Amanah Investment Bank Bhd equities research analyst Aaron Tan said Iran remains a “wild card” due to the existence of the black market for oil.

He said this is creating uncertainty over the actual amount of oil coming out of the country.

“Even when sanctions and embargoes were previously imposed on Iran, there was still an illegal supply of oil coming out of the country — it is thus difficult for observers and examiners to get a clear picture of just how much the country is producing,” Tan said.

He added that OPEC and non-OPEC members will continue to adhere to their production cut commitments, while US drillers will conversely raise production levels.

“Oil prices at the current level have typically seen US drillers increase production to capitalise on the higher oil price environment,” he said.

“Saying this, US shale drillers and unconventional oil producers have learnt from past mistakes and will look to avoid overproduction to prevent oil prices from returning to low levels.”

The benchmark Brent oil contract price has been trading at above the US$70 mark over the past three days for the first time since late January.

Over the past year, the index climbed 37% from US$51 per barrel to the current US$70 per barrel level now.