Geopolitical tension between the United States and Iran
On May 8, President Trump announced that the United States is exiting the Iran nuclear pact. Trump now plans to impose new sanctions on Iran. On May 21, US Secretary of State Mike Pompeo announced a list of demands for Iran. The demands are a prerequisite for any new agreement. He highlighted that all uranium enrichment activity must stop. Pompeo also said that all support activities for militants in the Middle East should stop. Iran rejected the demands.
The news of new sanctions on Iran has supported crude oil prices. Brent crude oil prices rose ~3% on May 9.
However, on May 25, Saudi Arabia and Russia said they could increase crude oil production after new sanctions are implemented on Iran and Venezuela. Brent crude oil prices have declined 5.5% since May 23 as a result of these sanctions and profit-booking. Brent crude oil prices saw their highest settlement since November 2014 on May 23.
The United States Brent Oil ETF (BNO) seeks to track the performance of active Brent oil futures contracts. BNO has declined 5.4%, since May 23. The SPDR S&P Oil & Gas Exploration & Production ETF (XOP) has decreased ~4.2%. XOP aims to follow the performance of the S&P Oil & Gas Exploration & Production Select Industry Index. Ultra Petroleum (UPL), CVR Energy (CVI), and Callon Petroleum (CPE) account for ~3.1% of XOP’s holdings. These stocks have declined ~23%, ~12%, and ~11% since May 23. They saw the biggest losses in XOP’s portfolio during the period.
Iran’s crude oil production
Iran is OPEC’s third-largest crude oil producer. Its crude oil production averaged 3.83 MMbpd (million barrels per day) in April. The country’s crude oil production is near a nine-year high, having increased after the US lifted sanctions in January 2016.
Iran and OPEC’s crude oil production cut deal
Iran supported extending the crude oil supply cut deal until December. OPEC allowed Iran to increase its crude oil supplies slightly to help it recover the market share that was lost when the country was under US sanctions. Iran is allowed to cap crude oil production at ~3,800,000 bpd (barrels per day).
Iran’s crude oil production plans
Iran’s oil production averaged 3.8 MMbpd in 2017. It aims to increase oil production to 4.7 MMbpd by 2021 and is looking for options of euro-denominated sales of the country’s crude oil, which could limit the impact of US sanctions. Iran could also be looking for options for renminbi-denominated crude oil sales.
However, new US sanctions on Iran could curb the country’s crude oil production and exports. According to Reuters, Iran’s crude oil supplies could decline between 300,000 bpd and 1,000,000 bpd depending on how many countries support fresh sanctions on Iran. Lower oil supply from Iran could support crude oil prices or push them higher.
See Top 3 Crude Oil Producers Impact Oil Futures and Which Factors Are Driving US Natural Gas Futures Higher? for the latest updates on crude oil and natural gas.