Sidebar

Exclusive Reports

29
Fri, Mar

OPEC's Output Deal Will Not Be Affected By Iran Sanctions

Top Stories
Typography
  • Smaller Small Medium Big Bigger
  • Default Helvetica Segoe Georgia Times

The decision of President Donald Trump to pull out of the Iran nuclear deal and re-impose sanctions on buyers of its oil will have a big impact on Iran's crude exports.

However, this is not expected to endanger the output deal among OPEC and its friends.

Reuter’s news agency reports that there is no pressure from within the group to bring their cooperation to an end. Far from it. The deal will run until the end of 2018 and could be extended again if participants don’t believe that the market has been rebalanced.

Last month I suggested that OPEC+ was in the process of dropping the five-year average level of inventories as a target. Last week Saudi oil minister Khalid Al-Falih did just that, denying that it had ever been the group's goal.

All the parties to the cuts are enjoying the benefits of higher prices and for many of them it is effectively cost-free – they are already producing as much as they can.

The only significant, immediately available spare production capacity within the group lies in Saudi Arabia, Russia and the United Arab Emirates. These countries have chosen not to boost their production in response to Venezuela's collapsing output, not because they lack the mandate to do so, but because they prefer the higher price that results from the loss to higher volumes for themselves. That calculation could quickly change in the event of a big drop in Iran's exports as a result of sanctions.

If Saudi Arabia and Russia decide that they want to supply the world with more oil, they can. There is plenty of historical precedent. Just look back at 2011 when Saudi Arabia boosted production in response to the loss of Libyan supply. Or look at 2015, when it refused to subsidize high-cost producers and embarked on the market-share strategy that was eventually brought to an end by the current output deal. It didn't seek the approval of other OPEC members in either case.

BLOG COMMENTS POWERED BY DISQUS