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Trump’s Oil Ban Might Hurt Himself And The World More Than Iran

By Investing.com (Barani Krishnan/Investing.com)CommoditiesApr 23, 2019 03:30AM ET
www.investing.com/analysis/trumps-oil-ban-might-hurt-himself-and-world-more-than-iran-200409282
Trump’s Oil Ban Might Hurt Himself And The World More Than Iran
By Investing.com (Barani Krishnan/Investing.com)   |  Apr 23, 2019 03:30AM ET
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The biggest winners of U.S. President Donald Trump’s ban on Iranian oil will be the Saudis. The biggest losers might not be the Iranians.

From China to India, as well as the United States, countries that primarily import oil are expected to pay more in the coming weeks and months as Saudi Arabia and its allies in OPEC maintain a razor-focus on revenue rather than ensuring enough oil for the world.

A Perfect Storm For Consumers

Making it a perfect storm for consumers will be fund managers chasing crude prices higher until there is—to borrow a page from the Saudi playbook—enough evidence of “market rebalancing”. The difference, of course, is that to change the direction of the market, the proof required this time will be that there’s abundant flow of oil again, versus the notion of tight supply that the Saudis were desperate to create just months ago.

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U.S. West Texas Intermediate crude has gained 45% in 4-1/2 months of Saudi and Russian coordinated production cuts under their enlarged OPEC+ club, besting the 40% it lost through the fourth quarter of 2018. Brent, the global oil benchmark, has risen 38% this year while U.S. gasoline has jumped even more, by 61%.

Trump expects OPEC+ members to quickly reverse their production cuts, as well as replace lost barrels from Iran and other sources such as Venezuela and Libya.

Riyadh stopped short of giving such assurance.

The president tweeted:

"Saudi Arabia and others in OPEC will more than make up the Oil Flow difference in our now Full Sanctions on Iranian Oil.”

No Free-Flowing Oil At Prices Consumers Want

Arab News, meanwhile, quoted Saudi Energy Minister Khalid al-Falih as saying the Kingdom will work to ensure the availability of oil supplies and the lack of market imbalance following the end of the U.S. sanction waivers on Iran. Decoded of political niceties, his remarks meant that whatever oil flows to the market will be at OPEC’s call—certainly not free-flowing and at prices consumers wished to pay.

Ellen R. Wald, oil market analyst and energy policy consultant who also authors a weekly column for Investing.con, said in a separate tweet that Saudi Arabia “isn't going to hamstring itself in OPEC by committing to a certain number of barrels”.

Scott Shelton, energy futures broker at ICAP in Durham, N.C., advises investors to beware of an oil rally that could get out of hand as “many think that (the) spare capacity (of the Saudis) is less than advertised” to put enough barrels on the market to win the perception game waged by fund managers.

Iran’s Business May Not Be Affected As Much As Thought

As for Iran, the Islamic Republic is expected to continue with the business of exporting its oil, with or without U.S. approval. For the first half of the past year, the Iranians operated stealthily to ensure their oil got to customers despite the sanctions. In the latter half, the Trump administration itself facilitated Tehran by giving out sanction waivers.

Now that Washington has terminated those waivers, a total of eight countries—China, India, Japan, South Korea, Taiwan, Turkey, Italy and Greece—are in a limbo over the security of their oil supply. The biggest of them—China—isn’t pleased to be at the mercy of an increasingly hawkish OPEC for its oil.

As the New York Times noted on Monday, all the eight countries initially approved by Washington for sanction waivers were U.S. allies on major security and diplomatic issues that did not involve Iran. China was the most sensitive of the lot, given the United States’ efforts to seal a trade deal with the world’s second largest economy.

China Protests Loudly At Trump's Move; India Less

Half of Iran’s estimated yearly export of one million barrels per day goes to China. Beijing pushed back hard against Washington’s aim to bring Iranian oil exports to zero, with Foreign Ministry spokesman Geng Shuang saying that “China consistently opposes U.S. unilateral sanctions”.

Geng added:

“The Chinese government is committed to protecting the legitimate rights and interests of Chinese enterprises.”

Unlike China, Iran’s other customers like India might choose to suffer quietly rather than criticize Trump.

Amit Bhandari of the Indian Council of Global Relations told Russian news site Sputnik:

“India has other options to buy oil. India imports about 4 million bpd and less than 10% of this comes from Iran. It is not that we are going to pay a higher price for just this 10%. Instead, the crude price increase will apply on our total oil imports.”

U.S. President Likely To Feel Americans’ Pain Too

But closer to home, Trump might feel the heat of higher oil and fuel prices through the pain endured at the pump by Americans, who have to decide whether to reelect him next year.

Riyadh and Washington have a history of cooperating for decades in curbing Iran's rise as a Middle East power. They also have their own motivations.

For the Saudis, it is decades of enmity with a country that ironically counts as one of the most important members of the OPEC cartel.

For Trump, it will be an extension of his mission to punish the Rouhani regime, which he accuses of evil terror deeds and of getting an undeserved deal from his predecessor Barack Obama to export its oil in return for what he deemed too liberal curbs on its nuclear program.

But none of these might be as important to Trump as keeping his electorate happy with low oil prices—and that isn’t a win for now.

Trump’s Oil Ban Might Hurt Himself And The World More Than Iran
 
Trump’s Oil Ban Might Hurt Himself And The World More Than Iran

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Sam Astor
Astor Apr 23, 2019 2:11PM ET
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First time ever, US Sec of State has a job actively marketing Saudi and UAE oil.
Barani Krishnan
Barani Krishnan Apr 23, 2019 2:11PM ET
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Well put!
inderjeet virk
inderjeet virk Apr 23, 2019 10:23AM ET
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another lifeline for shale oil
Barani Krishnan
Barani Krishnan Apr 23, 2019 10:23AM ET
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In due time, Inderjeet :)
Alex Malmstrom
CoinToss1 Apr 23, 2019 10:08AM ET
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Better the Saudi's than Iran.
Barani Krishnan
Barani Krishnan Apr 23, 2019 10:08AM ET
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Both are price hawks.
Ji Go
Ji Go Apr 23, 2019 7:25AM ET
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It's amazing, Mr. Krishnan. I really never sat and connected the dots until I saw your article headline pop up in my notifications: this long tailed expansion period is fueled on low interest/inflation. Cheap oil is the biggest tailwind underscoring the global economy--save the Crown, of course. And on the eve of his reelection campaign Drumpf wants to hand full autonomy to SA as if they, along with the rest of the Cartel+ coalition "forgot" the hole they were forced to claw their way out of because of his stunt. All that's left to contend with from a political standpoint is "Russian interference" in maintaining curbed supply. Aside from that the Crown's only real challenge now, if these waivers are actually rescinded, will be to organize an orderly increase/allotment of increased supply to fill the sanction gaps on the OPEC+ side, don't you think?
Barani Krishnan
Barani Krishnan Apr 23, 2019 7:25AM ET
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Hello Ji Go, absolutely. With a stroke of the pen, Trump has signed away the energy component of his pre-elective strategy to the House of Saud instead of betting on the longer haul (even 10 months might have made the difference) for shale to show another round of dominance, what with the majors entering the fray now. For now, as you say, the Crown will ensure it's a trickle rather than gush of oil (the latter too on its own terms when it happens) to ensure its dominance is never, never eroded again.
Barani Krishnan
Barani Krishnan Apr 23, 2019 7:25AM ET
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I do expect the Russian "interference", as you put it, to emerge at some point though -- if not for market share, then at least for Putin to remind young MbS who was the "real Big Brother" who stood beside him in his hour of need.
Ji Go
Ji Go Apr 23, 2019 7:25AM ET
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We're in lockstep agreement.
Hank Williams
Hank Williams Apr 23, 2019 7:19AM ET
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A deal has been made. The Saudi's have a plan to adjust to a diverse energy future (also note the recent adjustments made by major oil), via the Aramco deal. They will get more support if oil does not sky rocket. All of the analyst's interpretations of Saudi intentions is hilarious.
Ji Go
Ji Go Apr 23, 2019 7:19AM ET
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And how are they to get the money needed to invest in the infrastructure needed to diversify if they can't make budget, as their economy is still based on $80+/bbl Brent? You think the bond money that they obtained, a matter of months ago, is enough to make up their economic shortfall and pay for their divesting of oil and reorienting their entire economic policy and future? You give $10B a lot of credit...
Barani Krishnan
Barani Krishnan Apr 23, 2019 7:19AM ET
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Hank, you've made some interesting observations in the past on my articles and I'm a little amused myself that you're totally missing the point here on the price-focus of the Sauds.
Barani Krishnan
Barani Krishnan Apr 23, 2019 7:19AM ET
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Yes, Ji Go, you'd imagine $10 billion is a trillion, the way the bond market is salivating over what the Saudis have achieved.
Alireza Nemati
Alireza Nemati Apr 23, 2019 7:19AM ET
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A real story is that us wasn’t on the iran’s party after 5+1 agreement and the us president wants to prove iran that it has been an apparant mistake!
 
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