Oil and Iran: Different This Time?

Written by: Global Thought Leadership | May 11, 2018

Source: Bloomberg, May 11, 2018 Past performance is no guarantee of future results. Indexes are unmanaged, and not available for direct investment. Index returns do not include fees or sales charges. This information is provided for illustrative purposes only and does not reflect the performance of an actual investment.

 

THE BOTTOM LINE

  • Now that the U.S. has decided to withdraw from the Iran nuclear deal and reimpose its own embargo on Iranian crude, all eyes have turned to the crude oil market to assess what the move might mean for the price of energy in the months and years to come.
  • Since June 21, 2017, Brent Crude ran up from $44.82 per barrel (bbl) to as high as $77.47 at the close on May 10th of this year, a rise of about 75%. As usual, there was no single cause – but the move coincided with renewed supply discipline on the part of the Opec cartel after the beginning of Iran’s resumption of pre-embargo production in January 2016; the growing effectiveness of the latest sanctions on Russia; and growing confidence about future demand from the world’s developed and developing economies.
  • During the last embargo, Iran’s share of Opec’s total output fell from just under 13% to just over 8%, and Opec picked up much of the slack, keeping its production in the 30-32 million bbl/day, falling to 29.6 million at the end of November 2013.
  • Iran’s resumption of production coincided with the cartel’s aggressive attempt to recapture its share of global production lost to U.S. shale-oil producers, ramping production to as high as 34 million bbl/day, driving crude oil prices down from its $110 range in August 2013 to lows of about $34.75 at the end of 2015. At the time, legendary oil man T. Boone Pickens described the production ramp-up as an attempt to “teach those shale boys a lesson.”
  • Given Iran’s current relatively modest 12% share of Opec’s total production, the reimposition of an embargo on Iran by one of the 6 parties to the nuclear agreement might not move the needle as much as some expect.
  • In addition, the latest flare-up of armed conflict in the Middle East is in fact a continuation of a struggle that’s been going on in one form or another since before 1982. And it’s notable that Russia has chosen to sit out this latest bout – when rationales for its involvement would be easy to find if Putin were so inclined.
  • Bottom line: This most recent conflict in the Middle East is unlikely to be a repeat of the days of gasoline rationing and soaring fuel prices.  But with Opec’s return to self-control, it’s also unlikely that prices will plummet.  And for U.S. stocks, the recent rise in crude-oil prices has been an added source of support.

 


All data Source: Bloomberg, May 11 2018.

The Organization of the Petroleum Exporting Countries (OPEC) is a permanent intergovernmental organization of 12 oil-exporting developing nations that coordinates and unifies the petroleum policies of its member countries.

Brent Crude Oil is a major trading classification of sweet light crude oil that serves as a major benchmark price for purchases of oil worldwide. This grade is described as light because of its relatively low density, and sweet because of its low sulfur content. Brent Crude is extracted from the North Sea and comprises Brent Blend, Forties Blend, Oseberg and Ekofisk crudes.

 

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