On the 8th of May 2018, the United States government renounced its support for the multilateral agreement which precluded Iran from refining weapons grade Uranium. Following the initial accord in 2015, a majority of economic sanctions on Iran were relaxed. Among other concerns, including the alleged fact that Iran hasn’t been abiding by the proposed deal, the withdrawal also obliquely insinuates the US desire to reimpose crippling sanctions on Iran. A few facts worth mentioning for future references is that Iran currently possesses the fourth largest oil reserves in the world, and produces an average of 2 to 2.5 million barrels of oil per day of the 95 million barrels per day demand. This unanticipated move by the US is bound to unsettle the already precarious situation of the global oil industry.
South Asian and East Asian countries are currently the major importers of Iranian oil. These nations, however, are expected to follow through with their previous trade consensus and maintain their invariable demand for Iranian oil—at least for the time being. Iran currently pervades a crucial resource gap for the emerging superpowers of the eastern hemisphere, namely China and India. This vast lucrative market will naturally tempt many major oil suppliers; one of the major possible fallouts from the proposed embargo on Iran would be the competition between OPEC members, Russia and recently the US to fill this market gap and compete for long term Asian oil demand and capital. Iran would nevertheless strive to keep up its agenda to maintain its position as a major crude oil exporter to Asia. China National Petroleum Corporation and National Iran oil Company recently recently composed a 20 year oil exploration agreement; a similar deal had also been reached with a few europeans nations. Considering the rewarding stakes in Iran, along with the sizeable investment already committed, it is safe to assume that the Europeans will be just as disinclined to following the US mandate of re-imposing sanctions.
Since the inception of the deal in 2015, Iran has established an extensive supply-chain infrastructure to support its ambitious goals. This ‘neophyte’ in the world oil market has been met with consistent obstructions to hinder its goals to construct a considerably cheap oil market for its self. Saudi Arabia, currently the worlds leading oil producer, plans an initial public offering of its state owned oil company Saudi Aramco. Aramco plans to offer five percent of its stake in the open market, which comes down to $75 billion; the company is worth $1.5 trillion. The biggest and the most profitable IPO to date. To further maximise the profits and dividends from the IPO, Saudi Arabia would ideally like to keep the price of oil to north of 80 dollars per barrel. Logically speaking, the most convenient means of achieving this target would be to hinder the budding supply of the third largest crude exporter in the OPEC, as cheap Iranian oil poses a grim threat to this endeavour. The dilemma Saudi Arabia is facing at the moment is comical; though she wants to compete with Iran for the valuable Asian market share, any lowering of prices would directly threaten its ambition for a successful and profitable IPO. Russia corroborated to the supply cut agenda along Saudi Arabia since 2016 to help oil prices reach an equilibrium, hence it would also have negligible concerns at all imposing this beneficial isolation policy. This supply curbing from Russia-OPEC, further reinforced by the feeble condition of the already deteriorating Venezuelan oil industry, gives a clear indication of imminent price surging.
Although it is reasonable to expect that the most significant Saudi oil customer would be wary and objectionable to the repercussions of this price increasing contingency, the United States has maintained a unperturbed tacit disposition to this saga as it steadily grows from the biggest oil importer to a net exporter of oil within half a decade. The primary causality being, prolific and wide scale applications of shale oil and shale gas extraction. One might argue that regardless of the US growth in oil and gas production, the oil price standard pertaining to North America—West Texas Intermediate—has also risen considerably, which should discourage any further petroleum enterprise. Current oil prices—like oil prices following every major geo-political upheaval—are mostly speculative. Since a part of the European market will witness an inevitable supply cut following the imposed trade restrictions, Brent has skyrocketed, and currently sits at 79 dollars per barrel. West Texas Intermediate on the other hand, has also followed Brent’s soaring, yet on an inferior magnitude. The difference between Brent and WTI in 2017 never beat the mark of 6 dollars. Now, the difference has surpassed the 8 dollar mark. The reason being—leaving aside purely speculative measures—is the indifference of the American oil Markets with to the European or Asian Markets with regard to the imposed embargo. The reason for this growing indifference is the ubiquitous fact that the US has been relentlessly pursing, and achieving, energy independence. Moreover, the recent prolific production of oil in the Permian basin contributes to the overall supply glut in the US, which in turn stabilised WTI, at least for now. Although this unprecedented induced disparity between Brent and WTI is a sure sign of the market instability, it may not be wise to assume and predict long term market trends in such a a fickle industry.
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