Last month amid a steady two-week decline in crude prices, we broke down the different pieces surrounding global crude demand and supply and how that uncertainty could lead to continued volatility in the market. That downward pressure on prices has certainly continued, with WTI prices now almost $25/bbl lower than early-October highs. While there are many factors at play, today we’ll focus on the impact that waivers to US sanctions on Iran and potential production cuts from OPEC have on global crude balances, as well as how continued production growth from North America could force OPEC cuts to continue once waivers expire.
The US government had been talking of reducing Iran exports to zero months before the implementation of sanctions on November 5th, leading Russia, Saudi Arabia, and other OPEC nations to ramp production to stave off a significant crude shortage. As shown by the chart below, since the May announcement of sanctions, India, Japan, South Korea, and the EU have cut almost 70% of their imports of Iranian crude. On the other hand, both China and Turkey have expressed an unwillingness to cut imports from Iran ahead of US sanctions. The announcement of 180-day waivers to eight of Iran’s largest export destinations has provided those nations access to Iranian crude without fear of punishment.
While the quantity associated with waivers for some countries like Japan, Italy and Greece is unclear, major importing nations China, India and South Korea have been reported to be given waivers for 860 Mb/d. China also has rights to production from fields where Chinese companies have partial stake. Based on the above assumptions for the waivers provided by the US, crude exports out of Iran could total 1.25 MMb/d over the 180-day period, or about 310 Mb/d lower than October levels.
This number could vary, however, depending on the level of exports to China, Iran’s largest trading partner, and Turkey, which relies on Iranian crude more than any other source. If Chinese and Turkish imports remain at average levels since the announcement of sanctions, then Iranian exports could rise 100 Mb/d from current levels to 1.65 MMb/d.
Either way, the waivers upended markets that had previously been gearing up for a possible crude shortage. Saudi Arabia, the UAE, and Russia had collectively increased liquids production by 1.4 MMb/d from May to October. However, since the waivers were announced, Saudi Arabia plans to cut 500 Mb/d from production in December, and OPEC, along with partner nations like Russia, will discuss production cuts for 2019 next week. Russia and Saudi Arabia also plan to meet this week at the G20 summit in Buenos Aires and could settle on a preliminary production agreement ahead of the OPEC meeting. The chart below details how different production cut scenarios could affect global liquids balances if the effects from Iranian waivers are felt throughout the first half of 2019. Cutting 1.4 MMb/d of liquids production could leave global markets mostly balanced in the first half of 2019, while a more moderated approach of 1 MMb/d in cuts could put markets long by an average 620 Mb/d. If no cuts are agreed upon, liquids markets could reach as much as 1.75 MMb/d long by June 2019.
If production cuts are agreed to next week, though, unwinding them may not be so easy. While waivers for Iranian exports are currently supposed to end after 180 days, crude production growth in North America is expected to be steady and even accelerating in the back half of 2019. Assuming that Iranian waivers expire by the 2H 2019, the above production cut scenarios would still hold global balances roughly steady, potentially leading OPEC and partner nations to sacrifice market share as seen with the production cuts announced two years ago.
This interplay between balancing global markets and protecting market share are at the heart of the issues that OPEC and partners will discuss next week. While Saudi Arabia has shown a willingness to cut production in order to buoy prices, Russia has expressed hesitation after recently ramping production above October 2016 levels before the previous production cut agreement. To see how we think about global liquids balances and how that affects crude pricing, request a copy of the Oil Market Outlook today.