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Last Thursday afternoon's modest reversal into positive territory means that crude oil prices have a ways to go yet before an equilibrium takes over.
As of Thursday's close, West Texas Intermediate (WTI) had eked out a fractional gain, amounting to a two-session rise of 3.3%, and 6.4% for the month.
Meanwhile, Brent had posted a 3.2% two-day rise and a 7.5% gain for the month.
Given its wider use as the bellwether yardstick for oil trade worldwide, Brent often exhibits a greater sensitivity to geopolitics and global market pressures than WTI.
However, the even greater relief is this: Since the lows of early 2016, WTI is up 72.3%; Brent is up 77.7%.
Is this the result of Trump's decision to ax the Iranian nuclear deal (JCPOA)?
To a certain extent, yes.
Yet that impact is more the result of a knee-jerk reaction than it is any tangible correlation.
The expected renewal of U.S. sanctions against Iran will not hit for months.
Even then, it is uncertain how effective they will be in the face of concerted opposition from erstwhile allies in Europe, Russia, and China.
Once in place, those American sanctions will:
- Make it more difficult for Tehran to export its crude oil
- Reintroduce barriers to Iran accessing hard currency (essential for the pre-financing of oil sales, since the overwhelming majority of these transactions are still denominated in U.S. dollars)
- Make it more difficult for Iran to engage in international banking
- Place severe penalties on shippers and insurers who continue to work on moving Iran's oil
The genuine loggerheads, however, come with something else entirely...
The Real Test
Secondary sanctions are U.S. actions against third-nation companies facilitating Iranian trade.
Those are going to put American interests squarely against European.
That will be the real test.
My sources are indicating that the European Union will defend the ability of its members to continue doing business with Iran by invoking a so-called "blocking statute."
This is a mechanism preventing outside sanctions from applying to Europe.
The next step would be counter-sanctions by the EU against U.S. economic interests and trade.
The UK, France, Germany, and the EU - all signatories to the JCPOA with Iran - have already declared that Tehran is in compliance with the nuclear accord.
This is setting up a singular confrontation between Washington and Western allies unlike anything we've witnessed previously.
Iranian Exports Versus U.S. Production
Trump's declaration that the sanctions are coming back has animated the soundwaves and brought about a plethora of analyst commentary about the impending rise in oil prices.
As I have noted above, much of this is unwarranted.
The uncertainty does add to the volatility, but in the absence of other more tangible factors, it is not going to be the determining element.
Don't get me wrong here.
If the sanctions do work, they will reduce Iranian oil exports.
That should put pressure on the supply side.
And I do believe that prices will be rising.
However, the cause has less to do with current headlines and more with what else is taking place.
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Most expect additional production from U.S. operators to make up the slack.
Yet that is likely to have less of an effect in suppressing prices than would have been the case even a year ago.
For one thing, American companies are better able to balance production against demand.
With oil prices this high, there is less of an incentive to move as much volume to the market as possible to meet expenses.
For another, neither the global oil price nor the consequence of reduced Iranian exports will be enough to force the U.S. into pushing more volume into the global market.
Even if increased U.S. production ensues, it has a genuine impact only to the extent it can move internationally.
Yet American companies are reaching an effective ceiling on the amount of increased oil that can be exported.
As a result, the net downward pricing pressure resulting from Iranian export reductions will not automatically result from rapidly rising American exports.
But there are also other elements contributing to a rise in the floor of the pricing band...
And they just happen to be more important in accentuating a rise in prices.
The Main Driver for Oil Prices from Here
Other major members of OPEC - primarily Venezuela, Libya, and Nigeria - are suffering through significant contractions in production.
This is especially the case with Venezuela, where both oil extraction and exports are reaching 20-year lows.
In addition, there is substantial evidence that an effective market balance has been established, while global demand continues to increase.
All of the other considerations mean that upward pressures on oil prices have been in place well before the prospect of Iranian sanctions emerged.
The combination of these, with the prospects of what may come to pass several months from now should the sanctions have the anticipated impact, nonetheless bode well for higher overall oil prices.
And knowledge is all we need to better sleuth out profit opportunities lurking in the energy market.
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About the Author
Dr. Kent Moors is an internationally recognized expert in oil and natural gas policy, risk assessment, and emerging market economic development. He serves as an advisor to many U.S. governors and foreign governments. Kent details his latest global travels in his free Oil & Energy Investor e-letter. He makes specific investment recommendations in his newsletter, the Energy Advantage. For more active investors, he issues shorter-term trades in his Energy Inner Circle.