Traders Turn Bullish Ahead Of Iran Sanctions

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It’s that season again: ahead of the final quarter of the year, oil markets are once again riled by an event that will have a major effect on prices. Last year and the year before that, the market-riling events were OPEC meetings focused on production curbing. This year, it’s the Iran sanctions due to snap back in early November that has oil markets stirred.

As the date nears, traders and analysts spew price forecast after price forecast with a growing number of these in the bullish end of the ring. Many are saying that Brent will hit US$100 a barrel before the end of the year for the first time since 2014, with some forecasting the U.S. sanctions could remove 2 million bpd of Iranian crude from global markets. That’s certainly a major upward revision on earlier projections that mostly hovered around 1 million bpd of Iranian oil being cut from global supply at most. Yet the actual effect of the sanctions remains uncertain even with less than two months to go.

Bloomberg recently reported that the analyst consensus on how much Iranian oil will be shut off was 1.5 million bpd. The agency cited representatives of some of the biggest oil-trading houses globally as expecting Brent to hit US$90 before the end of the year and climb above US$100 soon after. Bank of America Merrill Lynch warned about this scenario in a recent note. However, there’s a caveat: the spike will be short-lived because US$100 a barrel is unsustainable.Related: Why Peak Oil Demand Doesn’t Matter

This is most certainly true, but there’s more. Even the current price level of Brent crude may well turn out to be unsustainable. Reuters earlier this week reported that some refiners in India were considering a curb in their imports and tapping local inventories in anticipation of higher prices. That should not come as a surprise: earlier this year India’s Petroleum Minister called on OPEC and non-OPEC producers to stop the price rise that had pushed Brent to US$80 a barrel.

OPEC—as represented by Saudi Energy Minister Khalid al-Falih—and Russia seem to think the market is in balance and no further production boost is necessary. Russia’s Alexander Novak said this week that the last quarter of the year was a period of lower oil demand so current production levels should suffice. But what about the Iran sanctions?

Well, what we know is that South Korea has not bought any Iranian crude since July and that Japanese refiners have suspended their imports from Iran as well. A Bloomberg breakdown of Iranian exports in early May shows that Iran exported a little over 300,000 bpd to South Korea and 137,500 bpd to Japan. Combined, this is a hefty amount, but it’s not as hefty as the amount of oil Iran exported to China at the time—almost 650,000 bpd—and to India, at a bit over 500,000 bpd. Iran also exported over half a million bpd of crude to Europe. So, the real question is how much of this oil will be shut off from the market.Related: Brent Oil Breaks Its Post-Crash High

China will continue importing Iranian oil. So will India, paying for it in rupees. The European Union also came up with a solution to the sanction problem: the EU will set up a special-purpose vehicle for trade with Iran. Reuters quoted European diplomats as saying the SPV will basically be used to process barter payments, avoiding the use of dollars in bilateral trade.

What does this all mean for oil prices? For one thing, it means Iranian oil exports will not be reduced to zero. The 2-million-bpd scenario is unlikely to play out. The 1.5-million-bpd scenario may have a better chance, but only if the United States somehow persuades India to cut all Iranian oil imports, which is quite unlikely. Europe and China have found ways to circumvent the sanctions. One wonders if Novak and Al-Falih knew something the rest of us don’t about the Iran sanctions when they said the market was in balance.

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