Oversupply problem returns to the market as US sanctions on Iran set to take effect from Monday
Abu Dhabi: The decision of the US government to grant waivers to eight countries from Iran sanctions is expected to have a bearish impact on oil prices, analysts said.
The US sanctions on Iran are set to take effect from Monday.
United States granted partial exemptions, known as waivers, to eight governments including India, China, Japan and South Korea, among others on condition that they continue to reduce their imports in the next six months to comply with sanctions, US Secretary of State Michael Pompeo said on Friday.
India, China, South Korea and Japan are some of the biggest importers of Iranian oil and there were market concerns that prices would go up due to oil shortage.
But with the decision of the US government to exempt some countries from Iran sanctions and Opec countries increasing their production, analysts point out that there could be an oversupply problem in the market that may negatively impact oil prices.
“We are currently witnessing a fundamental shift in oil markets from previous apprehensions concerning a supply crunch to now a real concern surrounding oversupply,” said Ehsan Khoman, head of MENA Research and Strategy at MUFG Bank in Dubai.
“The US administration’s waiver allowance for eight countries to import limited amounts of Iranian oil will dampen fears concerning a shortage of supply, which will add further downward bias to oil prices in the near-term.”
‘Growing risk of surplus’
Oil prices were trading lower when markets closed on Friday. Brent, the global benchmark was down by 0.08 per cent at $72.83 (Dh267) per barrel and West Texas Intermediate was at $63.14 per barrel, down by 0.86 per cent.
Oil prices rose in the last few weeks to trade at a four-year high of above $80 per barrel on supply concerns pertaining to Iran sanctions.
Edward Bell, commodity analyst from Emirates NBD also said the news that the US would be granting some waivers to the Iran sanctions is in the near term a negative for oil prices as countries will be able to continue importing some level of Iranian crude. “But it’s important to bear in mind that the waivers will likely be contingent on those countries continuing to cut back on their imports and the waivers will expire in 180 days.”
He also said the risk of a surplus returning is more a feature of demand than sanction waivers. “Most of the major forecasting agencies expect demand to suffer as a result of slower overall economic performance in 2019 and with still elevated paces of supply growth next year there is a growing risk of the oil market moving back into surplus,” said Bell, speaking to Gulf News.
“Our forecast is for oil prices to be trending lower over the course of 2019, expecting an average Brent price of around $73 per barrel next year.”
In similar comments, Jaafar Altaie, managing director of Manaar Energy, said there is no deficit of supply in the market.
“We still have a big potential from the US, Russia, Saudi Arabia and Iraq to bring on additional barrels to the market. We maintain that prices will be hovering around $80 to $90 barrels for the rest of this year.”
Meanwhile, Iran’s exports in November is expected to reach to close to 1 million barrels per day (bpd), according to Dr Sara Vakhshouri, president of Washington-based SVB Energy International.
“Out of this, we expect about 300,000 to 500,000 bpd going to China, 280 to 300,000 to India, 70 to 150,000 bpd to Turkey and 100 to 180,000 to South Korea.”