January 4, 2018 / 11:52 AM / 4 months ago

Breakingviews - Oil bulls look to Trump rather than Iran protests

By George Hay

A gas flare on an oil production platform in the Soroush oil fields is seen alongside an Iranian flag in the Gulf July 25, 2005

LONDON (Reuters Breakingviews) - The global market for oil enters 2018 susceptible to price-hiking geopolitical shocks. Unrest in Iran, which now looks to be dissipating, was an early contender. The next event – U.S. President Donald Trump’s potential rethinking of a 2015 agreement to relax sanctions on the Islamic Republic – is more likely to cause waves.

One reason the crude price is vulnerable to upsets is because the growing global economy has spurred demand. Supply is also restrained: the Organization of the Petroleum Exporting Countries and Russia decided in November to extend production cuts worth 1.8 million barrels per day to the end of 2018. Inventories of the black stuff have fallen closer to the average of the past five years, and exchange data cited by Reuters analysis shows hedge funds are betting strongly on higher prices. Meanwhile, oil futures contracts are showing signs consistent with an undersupplied market.

Iranian protests in which 21 people have died are a serious threat to President Hassan Rouhani’s authority. But short of a 1979-style revolution that upends the government and disrupts production, the country is unlikely to cut output. OPEC obliges the world’s fourth-biggest holder of proven crude reserves to stick to its current 3.8 million barrels per day cap. But Iran will strive to keep pumping, as oil exports help pay for domestic subsidies – one of the main flashpoints of the protests.

Trump is a bigger threat. The U.S. President is likely to decide by mid-January whether he deems Iran to be in compliance with its 2015 deal, which untied some of the punitive sanctions on the country. Reinstating them could have a big impact. Iranian oil production fell 25 percent between mid-2011 and the end of 2012, when restrictions were enacted in full, according to the Council on Foreign Relations. In the 2012-13 fiscal year the country’s oil and natural gas revenue slumped by 47 percent to $63 billion, according to the U.S. Energy Information Administration.

A step-up in sanctions doesn’t mechanistically guarantee higher prices. U.S. shale production could increase, and the other signatories to the 2015 Iran deal – China, Germany, the United Kingdom, Russia and France – might not follow Trump’s lead in enforcing new sanctions. Even so, the potential for Iran-related upheaval in the oil market lies in the White House rather than in homegrown protests.

Breakingviews

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