By Sonny Atumah
As oil prices spike the issue of production cut is still a cause for worry for the Organisation of the Petroleum Exporting Countries, OPEC as the United States impose sanctions on Venezuela and Iran. The prospect of crude inventory rebalancing once the current production cut deal expires is becoming mixed blessing for global oil producers and consumers. A non OPEC crude producer, Russia expressed concern then that a further price strength would spark a supply reaction from American shale. Is Russia’s perceived fear becoming a reality?
The current price hike inching towards the US$80 range has never been experienced in the last three years though some would say it was envisaged. Would OPEC tweak its production cut deal for more crude to save its members and the market in June? Although most of OPEC members in crunches are dependent on crude oil for fiscal revenues, there are doubts of production increase by OPEC because other geopolitical events globally influence global supplies. Analysts say Feedstock (crude oil) prices are influenced not only by actions of OPEC, but by demand factors and governmental regulations.
Iran and Venezuela are riddled with sanctions, and in the iron grip of the United States. With Venezuelan leftist leader Nicolas Maduro winning a new, six-year term in the presidential election a fortnight ago, the America policy towards his country would be that of a tight economy with oil production tumbling below its OPEC quota by about 500,000 barrels per day amid worsening financial and economic crisis. In April Venezuela’s oil output hit a long-term low of 1.5 million barrels per day.
The Trump administration barred the purchase and sale of Venezuelan government debt, including new debt issued by the national oil company, PDVSA and the central bank. The U.S. held off on sanctions on oil sales for now. Venezuela might avoid being hit by those harsher measures because oil prices are becoming very high. The Venezuelan situation featured prominently OPEC-Non-OPEC Joint Ministerial Monitoring Committee in Jeddah, Saudi Arabia.
The ministers bimonthly meeting discussed the latest developments in the international oil market, oil production levels and producers output cut compliance. The deal to curb global inventory which commenced in January 2017 might have reached an unprecedented 166 percent of compliance level last April. Reuters reported that falling Venezuelan output due to an economic crisis helped the OPEC deliver a bigger cut than intended under its pact with Russia and other producers to curb supplies and remove a global glut.
The US Treasury Department imposed sanctions against senior Iranian government officials accusing them of involvement in the transfer of millions of dollars on behalf of the Islamic Revolutionary Guard Corps to Hezbollah. President Donald Trump a week earlier abandoned the nuclear deal on May 8. The deal known as Joint Comprehensive Plan of Action, JCPOA signed in Vienna in 2015; Iran scaled back its uranium enrichment programme and promised not to pursue nuclear weapons. In exchange, international sanctions were lifted, allowing it to sell its oil and gas worldwide.
Since the sanction, French oil giant, Total said that unless it obtains a US Treasury sanctions waiver, it will pull out of a US$2 billion natural gas project in Iran by November. The world’s largest oil shipping container firm, Maersk of Denmark, said it would also end its operation in Iran. Amid these developments, there were reports the US was putting pressure on Europe to cut the Iranian banking system off from the Swift network, thereby depriving Iran of access to the institution that facilitates export and import payments, among other international transactions.
But India’s Foreign Minister Sushma Swaraj has given indication that his country will continue to import crude oil from Iran despite U.S. sanctions. India is the biggest importer of Iranian crude. The last time the United States imposed sanctions on Iran, India continued to trade Iran arguing that it was the United Nations that could impose such sanctions.Apart from crude oil India is assisting Iran in constructing the Chabahar port in the Gulf of Oman.
The port is strategic to India as a new maritime route that goes around its rival neighbour, Pakistan. Analysts believe India may settle its Iranian crude imports in national currencies to limit the risk of getting penalized by America. Iran would prefer such arrangement to reduce the use of the American dollars in settling its oil commitments from India. China which on the 26th of March launched its currency as a global currency in paying for crude may have also decided to to ignore the American sanctions on Iran. China is a major importer of Iranian oil.
The decline in global oil inventories and worries about the impact on oil supplies after the U.S. decision to withdraw from the international nuclear deal with Iran, as well as Venezuela’s collapsing oil output are causing anxieties in the crude market. And the United States said that oil prices were too high with President Donald Trump accusing OPEC of boosting oil prices. It becomes difficult to situate the equation that may never balance.