The absence of a strategy regarding crude prices could lead to new drops

Nearly all Iranian crude buyers have negotiated a series of exemptions with the United States for a certain amount of time

By Joaquin Robles, XTB Analyst

Over the past weeks, we have witnessed the progressive decline of oil prices as fears of a new deceleration rose. Said deceleration could spark a drop in demand. Another determining factor has been the fact that sanctions against Iran will seemingly be less strict than the market had anticipated.

The international markets will continue to receive crude supplies from OPEC’s third largest producer. This production will, however, decrease, after the country’s exports plummeted by nearly 40 percent since April, when Washington announced the sanctions. In an attempt to maintain relations with buyers, state-owned Iranian Oil Co. has been offering record discounts for its product.

Oil drop

Nearly all Iranian crude buyers have negotiated a series of exemptions with the United States for a certain amount of time. These nations have argued that reducing purchases to zero would affect their energy industries and increase fuel prices. The countries that will continue to purchase Iranian crude are South Korea, India, China, Japan, and Taiwan.

For his part, U.S. Secretary of State Mike Pompeo defended the exemptions. The official stated that Trump’s campaign to pressure Iran has already reduced its oil exports by one million bpd. He also added that this number would continue to increase. The exemptions were granted for 180 days and will be revised at the end of this period.

In view of these events, the OPEC said it would consider the possibility to implement a new production cut agreement next year. This could be a new shift from the organization’s last strategy.

Change of course

Saudi Arabia and Russia took the occasion to open the valve and spike production during a summer characterized by rising prices and unprecedented political pressure from U.S. President Donald Trump. Now, crude futures are growing weak in the face of a new wave of shale oil and rather lax sanctions against Iran. The cartel was set to discuss a new change of course over the weekend.

OPEC ministers and allies will meet today (11/11/2018) in Abu Dhabi. The officials will discuss scenarios that include the possibility of new production cuts next year. Some members are concerned that oil stocks are increasing.

Early in the summer, prices started to rise as the risk of a production deficit derived from the sanctions against Iran and the economic crisis in Venezuela rocked the market. The shortfall from those two OPEC members brought concerns of the largest interruption of supply since the beginning of the decade and Brent crude finally reached $86 per barrel last month.

Stabilizing crude prices

Since then, the OPEC has ramped up production “as much as possible” in order to reassure consumers, Saudi Energy Minister Khalid Al-Falih stated. The kingdom has increased its production to near-record levels, while Libya is pumping more than in the last five years. Unexpected exemptions for nations that purchase Iranian crude have mitigated the impact of U.S. sanctions.

These new scenarios have sparked a sharp drop in oil prices that does not seem to be slowing down. We hope that next OPEC meetings will serve to create a strategy focused on stabilizing prices before the end of the year.

For more information, check Energía16

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