Here’s how Rex Tillerson’s exit could move oil prices
Oil futures took Rex Tillerson’s exit from the post of secretary of state in stride, but analysts are underlining how his replacement could take barrels off the market from Iran and Venezuela.
Crude initially rallied Tuesday after President Donald Trump fired the former ExxonMobil chief executive and announced he would nominate Central Intelligence Agency chief Mike Pompeo to take over as the nation’s top diplomat. But gains didn’t last in volatile conditions.
Oil CLJ8, +0.33% LCOK8, +0.29% regained some ground Wednesday, as investors looked past a rise in crude supplies to focus on a large drawdown in gasoline stocks. Oil has seen renewed pressure in recent weeks on concerns about booming U.S. shale output, while signs of disagreement have emerged within the Organization of the Petroleum Exporting Countries over how to respond to the shale boom.
See: OPEC unity splits over differing views on oil prices
Analysts said some of those supply worries could be offset if the Trump administration now takes a harder line on Iran’s nuclear deal or intensifies sanctions on Venezuela. Analysts at JBC Energy in Vienna argued that the potential impact of a more hard-line policy on Iran could be bullish over the long run, but in the near term could inspire Tehran to pump more aggressively.
“Renegotiating the current deal and potentially re-imposing certain sanctions might make for a more difficult investment environment that would limit the upside potential to Iranian production, but in the shorter term it might also weaken their resolve to stick to and support the OPEC/non-OPEC [output curbs] if shorter-term income maximization became more important again,” they said in a Wednesday note.
David Cheetham, market strategist at XTB, argued that re-imposing sanctions on Iran would have a bigger impact on oil prices than the voluntary curbs on output agreed by OPEC and non-OPEC producers, including Russia, and which have been extended through the end of 2018.
“OPEC’s self-imposed curbing of output pushed the oil price to its highest in three years as recently as January, but these reductions are far smaller in scale than the potential disruption that could lie ahead in Iran,” he wrote. “A strict set of sanctions could therefore prove pretty bullish for the oil price and push it firmly back above the $70-a-barrel level.”
Analysts at Societe Generale, in a Tuesday note that was published ahead of the Tillerson firing, said a refusal by the U.S. to extend a waiver of Iran oil-export sanctions by May 12 would lift crude prices by around $10 a barrel.
Renewed sanctions would probably cut Iranian crude exports by around 500,000 barrels a day rather than the full 1 million to 1.2 million barrels-a-day increase seen since sanctions were lifted in 2015. That’s because the European Union, which is keen to see the deal remain in force, is unlikely to reimpose its full embargo on crude imports from Iran, the analysts said.
Venezuela could also be in focus. Pompeo’s past remarks indicate he could be inclined to take a tougher approach toward President Nicolas Maduro, according to the Washington Post.
The SocGen analysts said oil-related sanctions on Venezuela could have a $2.50- to $5-a-barrel impact on crude prices.
They said actions previously under consideration included, from least to most severe: a U.S. embargo on crude and condensate exports to Venezuela, which the country needs to meet demand; sanctions against tanker insurance for Venezuela crude exports; and a U.S. embargo on crude imports from Venezuela.
They noted that crude imports from Venezuela have already dropped from 700,000 barrels a day in the first half of 2017 to around 400,000 barrels a day in recent months, which would lessen the immediate impact on U.S. Gulf Coast refiners and global markets.
“Crude prices would temporarily increase until trade flows re-adjusted. The U.S. would fill the gap by importing more sour crude from Canada or the Middle East, and Venezuela would export more sour crude to India, China and Russia,” but would have to discount its crude to offset the higher tanker costs for the longer shipping distances, they wrote.
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