Oil Posts Biggest Weekly Drop Since February as U.S. Approves Iran Waivers. The Trump Administration seems to be achieving its tri-fold agenda of punishing Iran while balancing the world’s energy needs and keeping oil prices low, as crude markets posted on Friday their largest weekly loss since February.
Eight countries, including Japan, India, South Korea and China, will be given waivers to continue importing oil from Tehran once export sanctions against the Islamic Republic start this weekend, Bloomberg reported.
Secretary of State Michael Pompeo confirmed that it will be eight nations, but added that details will be announced on Monday. Crude oil markets fell further on the news, adding to Thursday’s 3% drop and losses since Monday that culminated in their worst week since February. U.S. WTI settled down 55 cents lower at $63.14 per barrel. For the week, it lost 6.6%.
U.K.Brent crude, the international benchmark for oil, was down 11 cents at $72.78 by 2:42 PM ET (18:42 GMT). Like WTI, it was also off 6.6% on the week. Data showing the first weekly drop in four for the U.S. oil rig count didn’t help, with just one rig reported off for this week.
Just a month ago, Brent hit four-year highs above $86 and WTI scaled 2014 peaks of nearly $77. But all that changed in October, with U.S. crude losing 11% and the U.K. benchmark 9%, their most since July 2016. President Donald Trump has vowed to bring Iran’s crude exports to zero since he canceled an Obama-era deal with Tehran in 2015 that allowed the third-largest exporter in OPEC to continue its oil sales to the world in exchange for curbs on its nuclear program.
But the Trump administration is also aware that choking off about 2 million barrels per day (bpd) of exports averaged by Iran without alternatives will only send oil prices rallying again, as they did in the third quarter. High oil prices could be a problem for the president and his Republican colleagues in U.S. midterm elections due next Tuesday.
Saudi Arabia, OPEC’s top exporter, has said lately that it will pump as much as necessary to keep markets supplied and Russia, another major oil producer, has also said there will be no squeeze. The United States, which basically flooded the world with cheap crude in three previous years, causing a glut, is again ramping up production, reaching a record high of 11.346 million bpd in August.
With the selloff in oil not appearing to be over, some traders think WTI could break below $60 and Brent under $70. Just a month ago, many thought Brent was on track to hit $100 as a momentum-driven rally took oil the other way. But Wall Street bank Goldman Sachs (NYSE:GS), an influential voice in energy markets, said it expects Brent to return to its target of $80 per barrel by year end.
“The granting of waivers does not imply that Iran exports will stabilize near current levels,” Goldman said, commenting ahead of Friday’s news. “As a result, we still expect that the global oil market will be in deficit in 4Q18, leading to a strengthening in Brent timespreads,” it said. “We expect this steeper backwardation to drive spot prices higher to our year-end $80 per barrel forecast, with low positioning also pointing to price upside in the short-term.”
Iranian oil: 40 years of revolution, war, sanctions and bans.
Nearly 40 years after the 1979 Islamic revolution saw the exit of Western oil companies from Iran, the Iranian oil sector faces yet another costly disruption after a series of interruptions from war, sanctions and diplomatic isolation.
Washington will reapply sanctions to Iran’s oil sector on Nov. 4, after ending its participation in an international deal governing Iran’s nuclear sector. Iran’s oil buyers outside the United States will stop or reduce purchases because of secondary sanctions applied on foreign companies that use the U.S. banking system.
Having lifted a self-imposed revolutionary ban on foreign investors in 1995, Iran has struggled to attract external investment for any sustained period. The isolation caused by poor relations with the United States and, in recent years, Tehran‘s efforts to develop a nuclear capability have prevented Iran building output capacity. But huge reserves run by the National Iranian Oil Co have helped it cling to its position as one of the world’s five largest oil producers.
The United States stopped buying Iranian oil or investing in Iran’s oil industry in 1979 and has not resumed since. Iran produces nearly 4 percent of the world’s daily oil supply and over the last 30 years has exported on average two-thirds of that.
The mid-1970s were the heyday of the Iranian oil sector, when its output accounted for 10 percent of global production. It has never returned to the record 6 million barrels per day (bpd) it pumped in 1974.
In that year it pumped 70 percent of the amount produced by OPEC’s biggest producer, its regional political rival Saudi Arabia, and more than three times as much as its neighbor Iraq. In 2012, when a first round of international nuclear sanctions was imposed, Iran’s output was only a third of Saudi Arabia’s, rising to 41 percent last year and just a little higher than Iraq’s.
Output dropped to a low of 1.5 million bpd in 1980, the year after Shah Mohammed Reza was overthrown, an event that caused the second oil shock across the economies of the West. It took 23 years for Iran to restore 4 million bpd in 2003, with a post-revolutionary peak last year just short of 5 million bpd of crude and condensate combined. Iran’s exports halved during the depths of the 2012-2016 international sanctions on its nuclear program.
It is unclear what proportion of Iranian crude sales will vanish from international markets after Nov. 4. The United States said on Friday it would temporarily spare from sanctions eight jurisdictions that import Iranian oil. The European Union would not be one of the eight, U.S. Secretary of State Mike Pompeo said.
This isn’t Iran’s first round of sanctions. It has devised ways to export oil under the radar, evading detection by switching off the transponders of its fleet of nearly 40 supertankers, using alternatives to the U.S. dollar for payment, or selling crude to private refiners, in small, harder-to-track parcels.