From April onwards, a month before the announcement of sanctions on Iran, President Trump began to criticise OPEC for maintaining high prices and to insist that it increase production; this was clearly aimed at ensuring that moderate prices prevailed despite the withdrawal of Iranian oil from world markets.
In response, Saudi Arabia led OPEC members and their non-OPEC partners in increasing production to record levels. Pressure on Saudi Arabia increased following the Khashoggi murder on 2 October when Trump made it clear that the Saudi crown prince realised the importance of Trump’s support which meant the kingdom maintaining high production even if this meant a significant fall in prices.
At November-end, prices fell below $ 60, the lowest level in a year. This was a 30% fall over two months, with Brent going from $ 86 to $ 58, and WTI down 7% to $ 50. This precipitate fall in prices compelled OPEC to take corrective action despite pressure from President Trump to maintain output at current levels for the benefit of American consumers.
OPEC and its oil-producing allies agreed on 7 December to cut production levels by 1.2 million barrels a day. Saudi Arabia will slash production by about 900,000 barrels a day compared with November levels, with Russia cutting 230,000 barrels per day out of the 400,000 barrels agreed to among the non-OPEC producers. Iran, Venezuela and Nigeria have been exempted from cuts.
Iran is already feeling the impact of US sanctions: in November, Iran’s oil output fell to below 3 million barrels per day (bpd) despite eight national waivers to sanctions granted by the US to China, India, Japan, South Korea, Taiwan, Turkey, Greece, and Italy.
Iran’s exports are expected to be around 1.1 million to 1.3 million bpd for the duration of the US sanctions. Its budget for the next fiscal year, beginning March 21, assumes exports of 1.5 million bpd. Hence, Iran could attempt to maximise barter deals to bridge the gap.
According to Saudi commentator, Wael Mahdi “everyone in Vienna knew that Russia played a big role in bridging the gaps in views among OPEC countries, despite not being a member of the organization, instead belonging to the alliance known as OPEC+.”
The deal had an immediate impact on oil markets. The prices of Brent crude and West Texas intermediate crude rose sharply after the news emerged: Brent crude was up more than 5 percent, to $63.16 per barrel, and WTI crude was up about 4.5 percent, to $53.79.
December 9, 2018