Iranian Oil Sanctions Are Going to Send Oil Prices Lower

The price of oil has been swinging up and down of late thanks to a mix of several factors. WTI crude oil is now back to the mid-50s once again, down sharply from the $66-a-barrel price that it was trading at just over three months ago.

This weakness in oil prices is a result of poor macroeconomic growth, which is expected to take a toll on oil demand. But with the U.S. imposing sanctions on Iran’s crude oil exports, will there be a turnaround in the price of oil in the future? Let’s find out.

What’s in Store for Oil Prices?

Ideally, the sanctions imposed by the U.S. on Iran’s oil exports should have led to an increase in oil prices thanks to lower end market supply. But that’s not the case as Iran has continued to pump more oil, and that oil is stored in tankers at sea.

This has created chances of further weakness in the oil pricing scenario as any relaxation of the sanctions will bring a huge amount of oil into the market and add to the supply glut. In fact, Iran is reported to have sent around 12 million to 14 million barrels of oil to China in the first five months of 2019, and it is feared that this could destabilize the market. As reported by CNBC:

“If China were to aggressively purchase Iranian crude oil and/or draw down on these stored volumes, oil prices would likely fall by $5.00 to $7.00 per barrel,” John Kilduff, founding partner of energy trading firm Again Capital, told CNBC on Thursday. “It would be a meaningful outlet for Iranian supplies that have been severely crimped by the sanctions.”

So the US’ decision to impose sanctions on Iran might not have the desired effect of boosting oil prices. Such a move could backfire spectacularly if China decides to bring that oil into the market. Moreover, Iran’s exports to China mean that the latter won’t need to import oil from other countries.

This could pose another problem as China is the world’s largest importer of crude oil. As a result, the sanctions imposed on Iran don’t augur well for oil prices as demand for the commodity has been on the wane.

Surplus Poses a Big Challenge for Oil Prices

Several agencies see demand for oil weakening in the coming months. In fact, OPEC sees a 2020 oil supply surplus of more than 500,000 barrels per day even if the cartel decides to keep its output at curtailed levels and demand remains constant.

Meanwhile, the IEA sees global oil demand on the slower side and also states that there is a surplus in the end market even though the OPEC has taken steps to cut output. In the first half of 2019 itself, oil demand exceeded supply by a massive 900,000 barrels per day.

So with a potential weakness in demand in the cards and with chances of higher surplus, don’t be surprised to see oil prices fall further.

Harsh Singh Chauhan has a wealth of experience evaluating publicly-traded companies across several verticals, including technology, oil and gas, retail, and consumer goods. His financial writing has been published across platforms such as The Motley Fool, TheStreet, and Seeking Alpha. Harsh's philosophy is to find great businesses for the long run based on company fundamentals and industry prospects. Address: 682 Indian Road, Toronto, Ontario, M6P 2C9. Phone: 416-721-8257.


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