On the surface you would think this is a deal about Iran and its proliferation of nuclear weapons. Yes, it is, but the immediate impact is being felt in the oil markets as the world reacts to President Trump pulling out of the Iranian nuclear deal. West Texas Intermediate oil rose as much as 3.1 percent to $71.17 a barrel on the New York Mercantile Exchange and traded at $70.81 at 8:58 a.m. Prices settled 2.4 percent lower on Tuesday. Total volume traded Wednesday was about 61 percent above the 100-day average. That’s huge volatility in the oil market.
Sanctions will effectively begin immediately, according to U.S. Treasury Secretary Steven Mnuchin, and current contracts that are in place are to be winding down over the next six months. Analysts are valuing the effect on oil production, with several scenarios forecasting a decrease in Iranian production by some 1 million barrels per day. Others say it could have a minimal impact of only several hundred thousand barrels a day. So who is impacted the most:
Sanctions against Iran could be more difficult to implement than those imposed in 2011-12, as the remaining nations in the deal are still agreeing to it. China, as the leading importer of Iranian crude oil, could also refuse to stop buying oil from Iran. This is another monkey wrench thrown into the trade tariff mix.
What is the view from the other side of the world? Iran believes it will continue to sell oil despite the U.S. pulling out of the 2015 deal. Gholamreza Manouchehri, deputy head of the National Iranian Oil Company, was quoted as saying, “They cannot stop Iran. Our oil industry’s development will continue even if new sanctions are imposed on Iran.” Sanctions could potentially create a 25 percent reduction in oil production from Iran, leaving the door open for Saudi Arabia to step in and mitigate any shortfall. This has yet to be determined.
Venezuela, OPEC’s eight largest producer and holder of the world’s largest oil reserves is already down some 900,000 barrels a day from its recent high in December 2015. Venezuela’s state-run oil company, Petroleos de Venezuela SA, is on the brink of collapse, according to Rafael Ramirez, who ran PDVSA for a decade before fleeing Venezuela. The picture in Venezuela continues to be bleak. A currency that is essentially worthless, mass migration to the cities, and health care and food shortages are ravaging the South American nation.
Questions will continue to circle in the near term as the world waits to see what the impact will be of the Trump pull out of the Iran nuclear deal. Another pillar of the Obama legacy has been pulled down as Trump backs yet another of his campaign promises to kill what he refers to as a terrible deal. One wonders if there will come a day when people will reflect back on the time when oil was a real commodity of value and a huge part of the world’s economy.