President Donald Trump has once again taken to Twitter to slamOPEC for driving up oil prices. The group is a useful scapegoat on which to pin the blame for rising gasoline prices at home, but getting it to pump more crude wont bring them down for long. The way to really lower prices is for him to change his policy on Iran.
Unfortunately, thats not likely to happen, so oil prices could well keep rising.Oil prices have climbed by more than 50 percent in a year, andvery nearly touched $80 a barrel last week as traders anticipated that theworldsmargin of spare production capacityavailable to offset supply disruptions is set to seriously shrink.
They know something that the president either cant or wont understand: When sanctions on Iran come into force in November, producers dont have the scope to make up for its lost output. If Trump succeeds in halting all of Irans oil exports, they will have to replace 2.7 million barrels a day of Iranian supply. Thats a big hole to fill.
And if they cant do it, the cost will be steep. According toBank of America Merrill Lynch, a complete shutdown of Iranian sales could push oil prices above$120 a barrelif Saudi Arabia cant keep up.
In Trumps world, the gasoline prices he focuses on should already be headed down. On Wednesday Saudi Arabia said it pumped about10.5million barrelsof crude a day last month, preempting thedeal reachedamong the OPEC+ group of countries in Vienna. Thats an increase of about 500,000 barrels a day from May, making it the biggest month-on-month jump in the kingdoms output since June 2004.
Gas Pressure
Prices are near the highest since 2014 -- just ahead of U.S mid-term elections in November
Source: Bloomberg
But theres a problem. The production jump ought to have shown up as a similar surge in total OPEC output. It didn't. The increase was entirely overwhelmed by declines elsewhere in the group. Add in the loss of 350,000 barrels a day of Canadian supply from an explosion at an oil-sands upgrader in Fort McMurray, and the entire boost from Saudi Arabia is gone.
Overwhelmed
Saudi Arabia's June output boost was entirely offset by losses elsewhere, but not from Iran
Source: Bloomberg
The simple truth is there isnt enough spare production capacity in the world to replace the complete loss of Iranian exports.Saudi Arabia can boost outputto 11.5 million barrels a day immediately and go to 12.5 million in six to nine months, Crown Prince Mohammed bin Salman told Bloomberg in 2016. Hes said nothing since that interview to suggest the figures have changed. Others are less optimistic the International Energy Agency said at the time that goingbeyond 11 millionwould require boosting costly offshore production.
The most that Saudi Arabia has ever pumped on a monthly average basis is 10.72 million barrels a day in November 2016, according to official figures provided to OPEC. Anything beyond that is uncharted territory. That doesnt mean its impossible, just uncertain. All we can say for sure at this point is that it has around 200,000 barrels a day of proven spare capacity immediately available.
Nearing the Top
Saudi Arabia's oil production is nearing the highest it's ever been, even before Iran sanctions bite
Source: Official figures collated by Bloomberg
There may be a couple of hundred thousand barrels a day in the United Arab Emirates and Kuwait, and as many as 500,000 in the Neutral Zone shared by Saudi Arabia and Kuwait. Fields there have lain idle since 2015 after Saudi Arabia closed them on environmental grounds. There are now suggestions thatthey could be reopenedin the coming months.
The rest of OPEC may hold another hundred thousand barrels of spare capacity and, outside the group, Russia has already begun toboost its production. Russia has never shared an official estimate ofhow much idle production capacityit could restore. Forecasts vary from 215,000 barrels a day from Renaissance Capital to some 500,000 barrels seen by state-run Gazprom Neft PJSC, the nations No. 3 producer.
But thats about it, around 1.5 million barrels a day of immediately available oil to replace what Iran wont be pumping. Thats not enough.
Releasing oil from the U.S. Strategic Petroleum Reserve might provide a theoretical short-term answer, but that wont work. It it is in the wrong place. American refineries are already running nearly flat out, so any additional supply from the SPR would have to be exported and it would take a couple of months to get it to the Asian refineries who would need it.
So when Trump tweets this:
Donald J. Trump
?@realDonaldTrump
The OPEC Monopoly must remember that gas prices are up & they are doing little to help. If anything, they are driving prices higher as the United States defends many of their members for very little $s. This must be a two way street. REDUCE PRICING NOW!
1:16 AM - Jul 5, 2018
its clear that, as energy consultant FGE said ina report last week, either President Trumps advisers do not understand the oil market or he simply just does not listen to them.
There is one way the president could quickly achieve lower prices, and its staring at him in the mirror. He could reimpose sanctions on Iran in a much more gradual manner, instead of all at once on Nov. 4.Sure, it would prolong the process, but it would also ease the pressure on oil markets and those all-important gasoline prices. Unfortunately, patience doesnt seem to rank highlyas one of the presidents virtues.
Pumping more crude into the market may seem as if it ought to ease fears of a supply shortage when Trumps Iran sanctions begin to bite but any relief will be short-lived. Oil prices will reflect this.
