Such is the level of disbelief in the market about the US decision to end all waivers to import Iranian oil, a baseless rumour (later quashed by the White House) that Trump was contemplating waivers for China was enough to crash the market on Friday, despite the likelihood that the Urals contamination issue will persist for long. Legally, Trump can reverse his waivers decision at any time, but it would be a big retreat politically. And, unlike last year, OPEC will only react once they see the drop in Iranian exports. So, if Trump issues waivers, Saudi Arabia will not raise production.
The irony is that last summer the market did not send any signal to OPEC that it needed oil when Saudi Arabia and its allies decided to push crude down refiners’ throats. This year, the physical market is screaming for oil even before the effects of the Iranian sanctions are felt and buyers nominate for replacements. Moreover, while they may not go to zero, Iranian exports will fall dramatically (to record low levels). Yet OPEC is happy to wait as flat price has not moved higher.
Saudi production will rise back to its quota level of 10.3 mb/d by June in response to improving compliance elsewhere. But this would push OPEC spare capacity below 2 mb/d from June onwards and down to as low as 0.6 mb/d by Q4 19, as by then the Kingdom and the others will have to be producing at record levels to offset Iranian losses, assuming no waivers. In Q4 19, we go back to record low stocks and spare capacity—even assuming Venezuelan output at 0.7 mb/d and Libya at 1.1 mb/d and Iranian exports at 0.6 mb/d. Even if OPEC+ manage to offset Iranian losses on a quantity (but not quality) basis, it will not be able to deal with any additional outage. Crude stocks are set to draw by 1.1 mb/d and 1.8 mb/d over Q2 19 and Q3 19.
|OPEC spare capacity, mb/d||Balance comparison, EIA vs EA, mb/d|
|Source: Energy Aspects||Source: EIA, Energy Aspects|