Saudi Arabia indicated on Wednesday that it could raise its oil output to offset any potential supply shortage as a result of new sanctions on Tehran, after US President Donald Trump said Washington was withdrawing from the Iran nuclear deal.
Oil prices had been supported by expectations that Trump would pull out of the deal, which could hit Iranian crude exports and feed geopolitical tensions in the Middle East, home to one-third of the world’s daily oil supply.
Trump said on Tuesday that the United States was reimposing the “highest level of economic sanctions” on Iran, but he did not provide details. The original 2015 agreement had lifted sanctions in exchange for Tehran limiting its nuclear program.
Saudi Arabia “will work with major producers and consumers within and outside OPEC to limit the impact of any supply shortages,” a Saudi energy ministry official said on Wednesday, according to state news agency SPA.
“Following the US decision to withdraw from the nuclear agreement with Iran, Saudi Arabia is committed to supporting the stability of oil markets for the benefit of producers and consumers and the sustainability of the global economic growth,” the official said.
After Trump’s decision to walk away from the Iran deal, Brent crude futures, the international benchmark for oil prices, rose to their highest level since November 2014 on Wednesday, at $76.75 per barrel.
The Organisation of the Petroleum Exporting Countries is in the midst of an oil supply-cutting deal with non-OPEC producers such as Russia that has helped erase a global glut and boosted oil prices above $75, the highest since 2014.
OPEC meets next in June, where it is widely expected to continue with the supply cuts until the end of 2018.
But a drop in Iranian exports due to a return of US sanctions, plus involuntary supply losses in other OPEC members such as Venezuela, would mean the supply cut would be significantly larger than intended. That raised worries of a quick rise in oil prices.
Iran produces about 3.8 million barrels per day (bpd) and the country is OPEC’s third-biggest producer, behind Saudi Arabia and Iraq. Its production accounts for about 4 per cent of the world’s oil supplies.
Since the Iran nuclear deal went into effect, its exports have risen to about 2.5 million bpd, from less than 1 million bpd. A majority goes to Asia, with Europe receiving about 600,000 bpd.
Analysts now expect Iran’s supplies to fall by 300,000 bpd to 1 million bpd, depending on how many other countries fall in line with Washington.
“Iran’s exports of oil to Asia and Europe will almost certainly decline later this year and into 2019 as some nations seek alternatives in order to avoid trouble with Washington and as sanctions start to bite,” said Sukrit Vijayakar, director of energy consultancy Trifecta.
Trade data already shows a reduction of Iranian oil supplies to Japan and South Korea, and refinery sources confirmed they had started shifting purchases to other suppliers in preparation for renewed sanctions.
Iranian crude oil shipments to Japan and South Korea have fallen by half from their post-sanction peak in March 2017, hitting just over 300,000 bpd in April, according to ship tracking data from Thomson Reuters Eikon.
The biggest single buyer of Iran’s crude is China, whose imports peaked at about 900,000 bpd in mid-2016 but have dropped to around 600,000 bpd in 2018, according to Thomson Reuters ship-tracking data.
A senior official with a Chinese oil major, who declined to be named because he is not authorised to speak to the media, said new sanctions would hurt Chinese refiners by pushing up the price of crude oil, the most important feedstock for the petroleum industry.
In India, refiners hope they can continue importing Iranian oil.
During the last round of sanctions, India enjoyed waivers allowing limited Iranian oil imports paid for in rupees instead of US dollars.
“The impact [of new sanctions] in India will be there, but not so high,” said R Ramachandran, head of refineries at state-owned oil firm Bharat Petroleum Corp.
When sanctions were loosened against Tehran in 2016, India ramped up imports from Iran to almost 900,000 bpd in late 2016, but intake has fallen back to around 500,000 bpd since the start of the year.
The threat of new sanctions comes as demand in Asia, the world’s biggest oil-consuming region, hit a record and producers restrict supplies to prop up prices.
As a result, crude oil inventories in major developed nations have fallen sharply in the last year and a half to 2.85 billion barrels, only slightly above their five-year average.
“I think we’re going to $80,” said Eric Nuttall, senior portfolio manager at Ninepoint Partners in Toronto, referring to crude oil prices. “We see inventories reaching a 10-year low by the end of this year.”
Last month, Trump accused OPEC in a tweet of “artificially” boosting oil prices.
With contributions from Reuters