OPEC’s Current Dilemma

As the US second and tougher sanctions on Iran approach (Nov 4th), many countries have begun to reduce their purchases of Iranian oil and its exports have already dropped one million barrels a day (from a high of 2.7 Million bpd to 1.7 Mill bpd in August 2018).

OPEC, under US pressure, promised last June to increase production by 1 Million barrels per day, but that has not yet fully materialized. Now, it is meeting to try to agree further production increases.

Whatever OPEC agrees, or doesn’t agree, may not be enough to compensate Iran’s lost production, even if other non-OPEC producers step in. Add to that Venezuela’s shrinking production and Saudi’s rumored technical difficulties in jacking up its production for a sustained longer period, it is not difficult to imagine an oil price spike to $ 100 or higher.

However, a $ 100 oil price would not only negate the US’s strategy but also infuriate its administration and possibly temporarily redirect its ire from Iran towards OPEC and speed up of the NO-OPEC law that has been slowly progressing in the US congress. Designating OPEC and its members as a monopoly and making them liable for sanctions and asset confiscation would certainly be a harbinger of OPEC’s demise, and a subsequent oil market chaos.

But a vacuum always invites competitors to fill it in and benefit from its ensuing turmoil. Reports indicate that US oil export sales are likely to cash-in by replacing Iranian condensate exports.

The US oil shale industry is overproducing condensate (as a byproduct of gas production) while the Asian market demand is growing rapidly (especially in Japan, South Korea and China). This is a perfect opportunity to replace the sanctioned Iranian condensate with US condensate – Two birds with one stone; squeeze Iran economically while increasing US producers’ sales and profits. No wonder Iran is getting angrier and angrier, which may be the third ‘bird’ objective; that is pushing it to act recklessly enough to invite a devastating US military strike.

GENERALLY: Pessimistic
NEGATIVE FOR: Iran as it will lose production, exports, income as well as market share that may be difficult to regain in the future. Also, it is negative for OPEC which is stuck between a rock and hard place; if it raises production too much it will destroy the higher prices that it struggled to attain in the past year, and if it doesn’t raise production, prices will spike and anger the US as well as negatively impact world oil demand. Its greatest negativity would be the case where it triggers a regional war.
POSITIVE FOR: the USA, only if its Iran sanctions are firmly observed by most countries, and only if they don’t lead to a shortfall in supply that spikes oil prices to intolerable levels.
IMPACT POTENTIAL: High
TIME SCOPE: Short and Medium Term

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