This week there have been several important developments related to oil and gas that will affect markets for the rest of this year and into 2019.
1. Iran Sanctions
On Monday, November 5, new U.S. sanctions on Iranian banks and Iran’s oil industry came into effect. As expected, the United States has offered exemptions to some importers of Iranian oil. This will permit these countries to continue purchasing Iranian oil for a period of 180 days. These exemptions, called Significant Reduction Exemptions, or SREs, were given to certain importers who requested them and were able to show reductions in the amount of oil and condensate they had been buying from Iran.
What we know about these exemptions so far:
- South Korea will be permitted to import 4 million barrels of condensate from Iran per month (130,000 bpd). This is down from the country’s previous high of 8 million barrels per month, but does reflect an increase from its September and October imports from Iran, which were at or near zero.
- India will be allowed to import up to 300,000 barrels per day. For reference, the country imported about 363,000 bpd in October, according to TankerTrackers.com and averaged 560,000 bpd so far in 2018, according to the Times of India.
- China, the largest importer of Iranian oil, was granted an exemption to import 360,000 bpd. This still requires China to significantly reduce its imports—somewhere between 658,000 bpd and 759,000 bpd, according to different sources.
- Turkey also received an exemption, but it is not clear for how much. Turkey imported under 100,000 bpd from Iran in October, but President Erdogan said recently that the country will not honor the new sanctions on Iran. Turkish companies may feel differently, however.
- Italy, Japan, Taiwan and Greece also received exemptions, but it is not clear how much, nor if these countries will choose to import any Iranian oil. Iraq also received an exemption to continue purchasing Iranian gas and electricity.
President Trump told reporters on Wednesday that he issued these exemptions based on the requests of certain countries and also because he did not want oil prices to spike. It appears the exemptions have accomplished this goal, alleviating fears that oil markets would soar to $100 per barrel and possibly beyond. However, when the 180 days are up, oil markets could be in for a jolt if the Trump administration holds true to its hard-line rhetoric on Iran.
2. U.S. Oil Production
American oil production continues to grow. Last week, the EIA reported record production of 11.3 million barrels per day in August. The weekly reports (which are a combination of reported production and projections) indicate that the U.S. is producing even more oil now. In fact, the latest numbers signal that by mid 2019, the United States could be producing over 12 million bpd of oil. In addition, voters in Colorado rejected a referendum to limit fracking within certain distances from “vulnerable” areas. This is widely considered a victory for the shale oil industry and indicates that more growth is coming in this region.
3. OPEC
Possibly the only thing that could push oil prices higher over the next few months is OPEC. The Joint Ministerial Monitoring Committee (JMMC) will be meeting this coming weekend in Abu Dhabi. Ahead of this meeting, OPEC is indicating it could consider returning to a more stringent enforcement of its production agreement. As it stands now, Saudi Arabia, UAE, Kuwait and Russia have all increased production to make up for involuntary declines in other countries, in order to bring the group’s overall compliance to 100%. The JMMC will be considering the supply and demand projections into 2019 at this meeting and could make a recommendation on whether the group should maintain, cut or increase oil production at the OPEC and OPEC+ meeting in December.
Iran, of course, would like some other OPEC members to stop exceeding their supply allocations in order to push up prices, but Saudi Arabia and Russia are unlikely to bow to Iranian pressure. Saudi Arabia is signaling that it might seek to tweak production levels to make sure the market doesn’t become over-supplied again, but cutting production is never that simple. Russia is already saying it is planning to produce more oil in the coming months, and the way Saudi Arabia has structured the OPEC+ group means that any move to freeze or limit oil production will require Russian support.