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- The expectation is that, with these new appointments, the Trump administration will be moving forward with additional sanctions on Iran
- If even just 1 million barrels per day of Iranian oil is removed from the market due to sanctions (or because customers simply stop buying Iranian oil under fear of future sanctions), the oil market could become significantly tighter.
The oil market went up last week even as the equities markets fell drastically. Earlier in the week, oil prices reacted positively to news from the Energy Information Administration that showed a larger than expected decrease in stored crude oil in the United States. Then, on Thursday and Friday, oil markets reacted to the dismissal of National Security Advisor H.R. McMaster and the appointment of John Bolton as the new Nastional Security Advisor with a significant jump.
Brent oil passed the $70 per barrel mark on Friday and WTI, the American benchmark, surged above $65 per barrel. Bolton, along with Mike Pompeo, President Trump’s pick to replace Rex Tillerson as Secretary of State, are considered hawks on foreign policy. Specifically, they are both known to oppose the Iran nuclear agreement struck under the Obama administration, which the President himself has derided as a bad deal for the United States. The expectation is that, with these new appointments, the Trump administration will be moving forward with additional sanctions on Iran that could affect Iran’s oil industry.
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However, OPEC countries could very easily decide to fill any gaps in supply from Iran. Moreover, if Iran’s export numbers fall, there would likely be a surge in production from U.S., Canadian and Brazilian producers—especially if the price continues to rise before they increase their own production. OPEC and its partners, particularly Russia, would prefer that they be the producers filling the supply gap left by Iran, and are likely to consider possible new Iran sanctions when deciding if they want to impose upon themselves production quotas beyond this year.
From Saudi Arabia’s perspective, the situation is optimal. Oil is surging exactly at the time when its crown prince, Mohammad bin Salman, is trying to tempt American business into the kingdom with promises of funding from its stimulus package. The kingdom’s economic prospects will look increasingly promising if oil stays in the upper $60 per barrel range because of expectations that U.S. policy towards Iran is changing. (Coincidentally, there are two different Arabic terms for “hawk.” One refers to the bird and the other refers to the proponent of tough policy. Arabic news outlets in Saudi Arabia have been using the former to describe John Bolton. They write it as a compliment).
