Oil: What If Iran Sanctions Were Back On?

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Includes: BNO, DBO, DNO, DTO, OIL, OILK, OILX, OLEM, OLO, SCO, SZO, UCO, USL, USO
by: ValueAnalyst

Summary

The rhetoric regarding renewed sanctions on Iran has increased.

A what-if analysis is warranted.

Renewed sanctions on Iran would have bullish implications on oil markets in 4Q17, and beyond.

The rhetoric regarding renewed sanctions on Iran has increased.

On September 14, NBC News reported that the Trump Administration is planning new sanctions against Iran. The article goes on to say that the new sanctions are aimed at entities and individuals tied to activities like procurement and human rights abuses, two senior administration officials and a person involved in the discussions told NBC News.

It is not clear at this time if sanctions will bring back the embargo on Iran's oil exports, but a what-if analysis is warranted.

Embargo Recap

Throughout 2012, the U.S., European and Asian governments moved against Iran’s Central Bank and oil exports by implementing sanctions. As a result, Iran's oil production dropped significantly from more than 3.5 mbd in January 2012 to less than 2.75 mbd six months later. Sanctions were then lifted in late 2015, and consequently, Iran's oil production rebounded.

Source: peakoilbarrel.com

Similarly, oil exports from Iran halved from nearly 2 mbd to 1 mbd during the period sanctions were in place.

Current Oil Demand Supply Imbalance

The following graph from OPEC's latest Monthly Oil Monthly Report ("MOMR") that OECD inventories have been declining versus the five-year average at a rapid rate since February:

As I discussed in my recent article, Oil: Another Bear Argument Bites The Dust, the latest 193 mb difference between July's total oil inventory level versus the five-year average represented a 59 mb month-over-month decline from June's 252 mb. This is very significant as, if one assumes the non-OECD inventories were stable in July, such a large drop in oil stocks in just one month means a very significant and increasing imbalance between global oil demand and supply of more than 1.5 mbd.

Bottom Line

Assuming July's quick pace of inventory declines continue, and considering Libya and Nigeria have increased their oil output in recent months, it is reasonable to expect the "glut" to largely dissipate by early next year.

If the Trump Administration brings back the embargo on Iran's oil exports, and other OPEC countries do not increase their supply in response, the glut would disappear earlier, and the bullish implications would continue into 2018.

The U.S. President's speech to the UN General Assembly this morning will likely include indications of the Administration's intentions regarding this topic. Stay tuned.

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