The United States is engaged in several world economic wars led by its president, Donald Trump, all of which have one or another impacted the financial markets including the oil industry as Iran’s exports amount to 80%.
The Gulf states are currently trying to compensate for the quantity exported by Iran by increasing exports which could offset this dip in oil supply.
Global economy at risk
With the escalation of positions on the Iranian nuclear file, the US is threatening to impose new economic sanctions on Iran and if that happens, other countries are going to suffer the consequences.
Iran has offered to resolve the crisis over its nuclear program peacefully by the 5 veto-wielding permanent members of the UN Security Council and Germany, based on Iran’s cessation of uranium enrichment for economic aid and incentives.
Otherwise, it will be subject to new economic sanctions and such sanctions will have a serious impact not just for Iran but the global economy as well.
Iran not only enjoys a strategic geographical location between the Caspian Sea and the Arabian Gulf but it is floating on the largest oil and natural gas reserves in the world after Saudi Arabia. It is now ranked fourth in terms of producing crude oil at about 4 million barrels per day and exports about 2.4 million barrels to India and East Asian countries which have recorded about 60% of Iran’s oil exports last year. Oil is the main source of income for the the country’s economy as it accounts for about 85% of its total exports.
US prohibits countries from importing oil from Iran
Iran is India’s third largest oil supplier and the Asian country imports large quantities of it to meet the needs of its growing economy but because of economic sanctions imposed on Iran they had to look for other sources to import them.
The US had given India a deadline to stop importing oil from Iran which expired on May 2 and the country complied.
China however did not cut its imports from Iran as a natural reaction to its economic war with the US. As of this writing, the economic superpower holds the record of being the world’s largest importer of crude oil.
China is the biggest importer of crude oil
Iran’s oil exports fell to about 300,000 barrels per day in June after almost approaching 2.8 million barrels per day early last year. This confirms the need for Tehran to increase their prices to compensate for the impact of the decline in exports as the country’s economy depends heavily on this precious commodity.
Figures show that the country will earn a third of its expected income from oil and gas exports which is about $33.9 billion. Their budget is based on an expected oil price of $50 to $54 a barrel meaning they need to export at least 1.5 million barrels a day in order for its economy to survive.
While Iran’s export volume is only 20% of what is actually needed to sustain its economy, it may move oil prices through its control of the Strait of Hormuz. Given the IMF’s expectation of new US sanctions, inflation in Iran is about 50% this year, the highest level since 1980.
Iran may be relying on hidden exports, through unannounced offshore and onshore stocks, as well as the closure of tracking devices in its oil ships, but the recent changes are making it harder for such measures.
If oil prices are affected by recent moves from Iran, its estimated 300,000 barrels per day (bpd) exports will also be affected but the country’s oil minister said their crude exports have not been affected by recent tanker accidents in the Gulf.
The outlook for oil prices, despite these events, still takes into account lack of demand and anticipated supply glut but reduces tensions in the Middle East at the expense of other factors.
The International Energy Agency (IEA) said it did not expect a significant rise in oil prices because of the lack of demand and because there is saturation in global crude markets adding that prices are determined by market demand which is slowing significantly as of this time.
The IEA expects global oil demand growth to shrink this year to 1.22 million barrels per day and that may fall again if the global economy, especially China’s, is further weakened.
There are large amounts of oil coming from the US which is estimated at 1.8 million barrels per day in addition to oil coming from Iraq, Brazil and Libya. With the current situation, it is not expected that there would be an increase in demand that could affect the price of crude oil although serious political tensions can still have a potential effect on the market.
Experts predict the black gold to trade around $60 to $67 a barrel in the second half of the year if there were no expected bilateral risks from Middle East tensions and the China-US trade war.
US sanctions against Iran
Oil market fundamentals still point to conditions in which demand is characterized by a weak macroeconomic environment, limited availability of supply due to conflicts and fuel consumption may be supported by higher compliance with IMO rules coming into force next year which may be erased.
The impact of any rise in prices in the current quarter resulting from the application of these rules is due to an expected increase of more than 2 million barrels per day on the capacity of the US pipelines in the Permian basin.
The Permian Basin, located in Texas and New Mexico, is the largest shale oil field in the United States and within the next few years it will be able to pump enough oil to surpass all countries in the world in oil production except Saudi Arabia and Russia.
The production of the Permian Basin is expected to rise to 20.4 million barrels per day in 2023, according to recent estimates from IHS Market.
According to IHC, the US could export 4 million barrels per day to foreign customers, compared with 1.1 million barrels a year earlier.
The Permian Basin is one of the country’s shale oil regions and drilling companies use modern ways to extract natural gas and oil through rock formations through “hydraulic fracturing”.
At its current production levels, the Permian Basin pumps 3.2 million barrels per day (bpd) which is already more than other oil producing countries such as Mexico and Nigeria.
Consequences of closing the Strait of Hormuz
Currently, more than one-third of the world’s oil supplies pass through the Strait of Hormuz and majority of them goes to China, Japan, India and other Southeast Asian countries.
For the UAE and Saudi Arabia, closing the strait and preventing giant oil tankers from passing through would be a disater because military action would cope with it regardless of its size.
This could halt investments, trade and tourism on which the UAE is building high hopes for the future. And even if China could find alternatives to Iranian and Gulf oil, the costs would be much higher.
Who makes up for the lack of oil exports?
So far, the possibility of war has been ruled out by most experts but they see Washington’s success in imposing a further ban on Iranian oil exports, currently estimated at 1.2 million barrels per day, compared with more than 2.5 million barrels per day last year.
Before that, US President Donald Trump succeeded in imposing a ban on Venezuelan oil exports until it fell to half a million barrels against 1.5 million barrels late last year and was more than 3 million barrels several years ago. There was also a decline in Libyan oil supplies by more than half to reach to 0.7 million barrels per day due to political instabilities in the region.
Crude oil exports
It is able to compensate for all this shortage in oil exports which is expected to reach more than 5 million tons in two years at most if the sanctions continue and because of maintenance and breakdowns and increase global consumption and sabotage.
In reality, the UAE and Saudi Arabia cannot compensate for this huge shortfall completely because their additional maximum production capacity does not exceed 1.5 million barrels per day and for Iraq, it needs several years in order to increase its oil exports significantly because of the need for many additional investments in oil extraction. According to a Bloomberg report, it is estimated that Iraq needs to increase its production by 30% to reach the production of 6 million barrels per day until 2030.
Is there a hidden agenda from the US?
The US has threatened Iran by banning its oil exports which can also paralyze the global supply of this precious commodity. Analysts however see these threats with a hidden ambition to control the global energy market.
Should the sanctions proceed, Trump said that the UAE and Saudi Arabia will compensate for the lack of oil supply. Iran however has threatened to close the Strait of Hormuz to oil tankers if the US carries out its threats.
In light of this, it seems that Abu Dhabi and Riyadh are not aware of the potential dangers of compensating for Iranian oil if Washington succeeds in imposing a ban on Iran’s oil exports.
It will be unable to cover the cost of importing food, medicine and other essential goods to more than 80 million Iranians who rely mainly on the proceeds of exporting black gold.
US started exporting crude oil
Russia has limited capacity to increase oil exports unlike Iraq which has managed to increase production by 1 million barrels per day during the past three years.
Currently, Iraq exports about 3.5 million barrels per day of its total production, which is close to 4.5 million barrels per day and if Iraq is trying to return to its previous oil production and export, the US is shifting from an oil importer to an unusual exporter, in addition to its stock, which may reach 450 million tons at the present time.
US oil production significantly increased over the last 5 years. In fact, the latest numbers show that it has increased its exports to more than 1 million barrels per day during the previous year.
US exporting crude oil
Data showed that US oil exports increased during the month of March to over 3 million barrels per day and the bulk of them went to countries in Southeast Asia and Europe at the expense of quotas of countries led by Venezuela and Iran.
A number of experts also predicted that in less than 3 years, the United States may be able to export 5 million barrels per day and may be able to reach the production of about 20 million tons in less than a decade which means a significant increase in exports and potentially could lead to the removal of Saudi Arabia and Russia from the list of the world’s biggest oil exporting countries.
It appears that the US is expected to gain leadership and control of the global oil market through international sanctions policy and undermine the role of the Organization of Petroleum Exporting Countries (OPEC), which has recently been subjected to many threats by Trump on charges of monopolizing the market and demanded to increase oil production and exports.
The sanctions imposed on Iran resulted in the liquidation of Iranian oil exports which led to a relative rise in prices and has a direct effect on some of the countries that were importing oil from this middle eastern country.
Oil prices have returned to normal and are expected to remain stable for the time being as long as there is no political tensions affecting the market. However, sudden fluctuations are still expected so be sure to take advantage of this opportunity by trading commodity CFDs with Q8Trade!