Doubtful if Opec can replace Iran oil post sanctions, say analysts
About 1.5 mbpd of Iranian oil is expected to disappear from the market once US sanctions kick in next month
Abu Dhabi: It could be difficult for Saudi Arabia and its allies to fully replace lost Iranian barrels once oil-related US sanctions on the latter come into effect from November, analysts tell Gulf News.
Saudi Arabia’s Crown Prince Mohammad Bin Salman told Bloomberg in an interview during the weekend that the kingdom is fulfilling promises to make up for Iranian crude supplies lost to American sanctions.
“The request that America made to Saudi Arabia and other Opec countries is to be sure that if there is any loss of supply from Iran, we will supply that,” he said in the interview. “And that happened.”
million barrels per day produced by Saudi Arabia
“We export as much as two barrels for any barrel that disappeared from Iran recently,” the Crown Prince added. “So we did our job and more.”
But analysts are sceptical whether Saudi Arabia and its allies will be able to fully meet the global oil demand, once Iranian oil goes off the market in November.
“Our base case scenario is that 1.5 million barrels per day of Iranian oil will disappear from the market. It is my opinion that Russia and Saudi Arabia will struggle to fully offset this shortfall,” said Stephen Brennock, a London-based analyst from PVM Oil Associates.
current trading value of Brent crude oil
“This is especially true given the fact that we are heading into the annual high point for global oil demand. Any respite from the looming supply squeeze will only come in the next year, when demand experiences its usual seasonal dip and fresh production capacity comes online,” he added.
Saudi Arabia is currently producing 10.7 million barrels per day (bpd) and has 1.3 million bpd of spare production capacity on hand, according to Ehsan Khoman, head of Mena Research and Strategy at MUFG Bank in Dubai.
“Increasing it to near capacity limits has never been demonstrated, and it would mean using almost their entire capacity, which for us is significant unchartered territory,” he told Gulf News.
“The fundamental concern is that Opec and its allies are in a spot of bother — each additional barrel of oil that is produced entails one less barrel of spare capacity available to counter any unexpected geopolitical or unplanned supply-side shocks.
“As such, if Opec, notably Saudi Arabia, do increase oil output significantly, then this spare capacity buffer would gradually become worryingly thin, and in essence creating a supply crunch.”
Oil prices are currently trading at near four-year highs with Brent, the global benchmark at $84.16 (Dh309) per barrel and West Texas Intermediate at $74.34 per barrel.
US president Donald Trump has been pressuring Opec to increase production to cool prices.
In a tweet last week, Trump criticised oil producing group and said: “The Opec monopoly must get prices down now!”
He also spoke to Saudi Arabia’s King Salman to discuss efforts being made to maintain supplies to ensure oil market stability and global economic growth.
One mechanism that the US could exploit to stem the prospects of “higher for longer oil prices”, is to release some level of the existing 664 million barrels of crude oil in its Strategic Petroleum Reserves (SPR) into the market, in an attempt to lower oil prices and in turn, keep a lid on US gasoline prices ahead of the US midterm elections, Khoman added.