Why the Saudis can’t keep a lid on oil prices

3 October 2018

Saudi Arabia is incapable of offsetting all of Iran’s crude oil supplies, according to the latest oil market message shared by several analysts who spoke to CNBC. Based on this, the analysts said, Brent crude could very well hit $100 a barrel before this year’s end. Yet nothing is certain, and this uncertainty will only deepen as the Iran sanction launch approaches. It may turn out that things are not what they seem.

Market players have been toying with the idea of $100 oil ever since President Trump pulled the United States out of the Iran nuclear deal. Since then, we have had one Opec+ meeting where Saudi Arabia and Russia assured the market that there would be enough oil to keep prices steady. We have also had a string of increasingly alarmist headlines quoting unnamed sources from Indian and, most recently, a Chinese refiner, who said they were cutting their intake of Iranian oil, heightening concerns that Iran’s exports may be restricted more than originally feared.

In June, few were willing to question Saudi Arabia’s claim that it had enough spare capacity, and that it could ramp up production utilising that capacity to reach more than 12 million barrels a day (b/d) should the need arise. Now, however, there are doubts. Stephen Brennock from PVM Oil Associates said in a research note that this “focus will turn to meek levels of global, or more accurately, Saudi spare capacity."

Indeed, compared with the grimmer estimates of 2 million b/d in lost Iranian supply, 1.5 million b/d is a modest amount. Yet it is a little early to assume as much as two million barrels in daily supply from Iran will be lost.

TankerTrackers, for one, reported last month that there were more than a dozen Iranian tankers that had gone offline in the Persian Gulf. Now, while some of these may very well be storing oil offshore, others may just as well be on their way to an import destination.

One recent news report that basically put a stick of dynamite under Brent came from Reuters, which quoted anonymous sources from Sinopec as saying that China’s biggest crude oil refiner would slash its oil imports from Iran to as little as 130,000 b/d. This, however, is based on calculations made by Reuters, which used “the prevailing supply contracts” between Sinopec and the National Iranian Oil Company.

Last week, Bloomberg also added fuel to the flames of bullish sentiment by quoting (again unnamed) sources from Indian refiners as saying they still have not ordered Iranian oil cargoes for delivery in November. The shocking headline, however, may be a bit premature. Remember those offline tankers? Besides them, a New Delhi government official told Reuters at the time that there had been no decision to stop buying Iranian crude. Later, Iran’s foreign minister said that India would continue to buy Iranian crude despite the sanctions.

Who are we to believe? The very fact that this question needs asking explains why prices could hit $100 before the end of 2018, regardless of the actual supply situation. It would take until at least the end of November for anyone to gather enough meaningful — and reliable — tanker data to determine how much Iranian oil is being lost. By that time, Brent may be testing $90, judging by how the news of Saudi Arabia and Kuwait discussing the addition of 500,000 b/d to their combined production within a couple of months failed to have any negative impact on prices. Quite the contrary, Brent started this week with another gain, now trading at over $83 a barrel. The market may be panicking, and where there is panic, common sense and logic are out the window. Brent may very well reach $100, at least until reality settles in, demand slumps, and prices find their way back down.

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