Tuesday 23 April 2019

Upside price risks seen in oil during Q4: Barclays

LONDON, July 30, 2018

US policymakers will likely play a more outsized role in guiding global oil prices than in recent memory, said Barclays, a British multinational investment bank and financial services company, highlighting that it flags the possibility of significant upside price risks in Q4 and downside risk in subsequent quarters from this development.

Barclays Research recently hosted a premier event in New York discussing the implementation of Iran-related US sanctions and the associated geopolitical ramifications.

Important generalized takeaways from the event:

The iterative process of sanctions implementation. In Barclay’s view, in the months ahead, US policymakers will play a more outsized role in guiding global oil prices than in recent memory. Second, non-government speakers noted that Iran sanctions may be most effective at reducing oil supply up to November, although subsequent rounds are likely to be more subjective. Third, the laser focus on barrel reductions ignores that the administration has significant latitude with the way in which it will enforce these sanctions, and the pressure applied could be subsumed under other broad geostrategic and economic priorities.

There are other ways in which these sanctions could be enforced, on which we elaborate below. While “going to zero [imports from Iran]” by November 4 is the US government’s stated goal, there is a sizable chance that this will not happen, in Barclays’ view.

Barclays maintains its estimate of a disruption to Iran’s crude exports of almost 700 kb/d, but India will be the biggest swing factor.

“Our balances assume Iran’s crude output is almost 700 kb/d lower by early Q2. From the perspective of our non-government speakers, it is likely that the initial round of sanctions implementation could lead to a disruption to Iranian crude and condensate exports of up to 1 mb/d in November/December,” said Barclays.

“That said, in their view, such a sizable disruption could conceivably lead to a price effect so large that the US government may ease the way in which the sanctions are applied in the second and third six-month rounds. From Iran’s perspective, though it is likely to pursue many other workarounds, in the past this amounted to an offset that totalled no more than 150 kb/d (+/-50 kb/d). We believe other offsets, including commingled sales, swaps with Russian entities, and higher domestic use of condensates, will help the country limit the effect on production.”

Significant upside price risk in Q4. The administration is likely to be forced to dial back the severity of its sanctions implementation in the aftermath of the first six-month phase. In line with this, Barclays highlights significant potential for upside price risk in Q4 and downside risk in the following quarters from the Iran sanctions issue. The Trump administration’s stated desire to minimize the disruption to global oil markets means that its approach to significant reduction exemptions (SREs) for Iran’s oil importers may differ from one round to the next.

“They [the US] have the watches, we [Iran] have the time.” Finally, in the opinion of some of our non-government speakers, current US policy has not furthered the regime change objective; if anything, it has strengthened the regime among certain key constituencies. The US withdrawal of the JCPOA strengthened regime coherence and has led Rouhani to slide even further to the right, according to Barclays’ Iran expert speakers.

Though there is much discontent with the economy, the country is not yet in a pre-revolution stage, in the view of Barclays’ Iranian domestic experts. It is also possible that the media is over-hyping the presence of protests, and one of our speakers noted over 1,000 labour strikes in Iran in the past year. From the perspective of the Iranians being able to weather the coming storm, one speaker quoted a Central Bank of Iran official noting that this will be the fourth oil embargo and the 151st hard currency crisis in the past 30 years. – TradeArabia News Service

Tags: US | Barclays | oil price | Iran sanctions |

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