1) OPEC ministerial (production increase accepted): On 22 June, OPEC ministers announced a deal that will increase oil supplies from the producer group, which has been capping output in order to balance the market and boost prices for the last 18 months. However, no firm figures relating to production increase were announced nor was it indicated how the increases would be allocated among members.
The agreement came after a week of tense negotiation at OPEC's headquarters in Vienna. Top OPEC producer Saudi Arabia faced the challenge of convincing a handful of reluctant producers including Iran, Iraq and Venezuela to support an output hike. OPEC's official statement said members agreed to return to 100 percent compliance with the 2016 deal beginning on July 1. The group said compliance reached 152 percent in May 2018, which means OPEC was cutting about 600,000 bpd more than it intended.
Commentators believe that this OPEC decision is a victory for Saudi Arabia and that one million barrels per day could now be added to the market by OPEC producers. These additional supplies will not be produced immediately as most countries are not in a position to boost production so quickly, so that additional supplies would be about 600,000 b/d.
However, the promise of increased Saudi production to make up for the withdrawal of Iranian oil from the market (details below) led to a slight fall in prices; on Monday, 2 July, Brent futures were at $ 78.35/ barrel, a decline of 88 cents or 1.1 percent. WTI was $ 73.26, a fall of 89 cents or 1.2 percent.
2) US Embargo on Iran’s oil exports: During a background briefing on 26 June, a senior state department official announced that the Trump administration wants to eliminate imports of Iranian oil by its current customers. The official told journalists that, during a tour of countries that has already begun with a visit to Japan, U.S. officials will be “requesting that their oil imports go to zero, without question.”
The announced policy is akin to a reduction of over 2 million barrels per day.
Observers believe that Saudi announcement that it will boost its production to record levels in July suggests the Saudi commitment to raise production would have been coordinated with an American effort to eliminate Iran’s export market entirely. After the OPEC ministerial in Vienna on 22 June Saudi energy minister Khalid al Falih had said that ARAMCO would increase output by “hundreds of thousands of barrels”, with precise figures to be decided later.
However, there are doubts about whether Saudi Arabia can produce beyond its quota to make up for shortfalls from other producers, such as Venezuela, Angola and Libya; Iranian oil minister Bijan Zanganeh has said this is not permitted and that Saudi Arabia “can increase its production by less than 100,000 b/d”. Other reports suggest that Saudi production in June was 10.72 mbd, 700,000 b/d higher than the previous month, and is expected to be 10.8 mbd in July.
Thus, Iran is facing the most serious challenge to its economy and political integrity to date. The Trump administration has taken its avowed commitment to exert “unprecedented financial pressure” far beyond the realm of coercion and into the realm of destruction. For Iran’s government, which receives about half of its revenues from oil sales, the prospects are grim. Such an outcome is consistent with the regime-change goals of the Trump administration and its regional allies.
July 3, 2018