Despite the comments of many who have never traded anything in the financial markets (corroborated by those who have but who are talking up their own long crude positions) that there will be little effect on the oil price when at least 2.5 million barrels per day of Iranian crude oil returns to the market, this is highly unlikely to be the case. The fact that global trading giant Goldman Sachs is still targeting Brent crude oil to hit US$80 per barrel at some point this year, however, is significant in three ways. First, it means that Goldman itself has already authorised its mighty proprietary trading vehicles to buy Brent in a market that has nowhere near the liquidity of, say, the global foreign exchange (FX) market, meaning that traders can get a lot more trading effect for a lot less money in oil than in FX. The price action of this sort of activity by a true trading giant such as Goldman has been sufficient in and of itself on many occasions in the past to significantly move and sustain prices at certain key levels. Second, given Goldman’s stellar trading reputation in many financial markets not only will its own major clients also be buying Brent but so will all of those in the markets who are aware of what a recommendation from Goldman can do to as asset’s price, so producing a self-fulfilling trading prophecy scenario. This said, though, there is only so long that the fundamentals of supply and demand can be bucked, especially in the oil market and even more so when the U.S. government does not want oil prices higher.
As was very clearly demarcated under the government of former President Donald Trump – but pertains to all U.S. presidencies of recent years – Washington simply does not want oil prices on the higher side in general. The economic reason for this is that for every US$0.01 that the U.S.’s national average price of gasoline rises more than US$1 billion per year in discretionary additional consumer spending is estimated to be lost. As a general historical rule of thumb, it is estimated that every US$10 per barrel change in the price of crude oil results in a US$0.25 change in the price of a gallon of gasoline. Based on more recent historical precedent, a US$90-95 per barrel of Brent oil price equates to around US$3 per gallon of gasoline and a US$125-130 per barrel of Brent equates to around US$4 per gallon of gasoline. The ‘danger zone’ for U.S. presidents starts at around US$3.00 per gallon and at US$4.00 per gallon, they are being advised to pack their bags in Pennsylvania Avenue or start a war to divert the public’s attention. The point was underlined by Bob McNally, the former energy adviser to the former President George W. Bush that: “Few things terrify an American president more than a spike in fuel [gasoline] prices.”
For Trump, the early warning for Brent oil pricing was anywhere above US$70 per barrel, which is why whenever Brent looked like it was going to trade decisively above there and towards US$75-80 per barrel he started to Tweet veiled threats to OPEC members, especially Saudi Arabia. Specifically, for example, when the Saudis (with the help of Russia) were pushing oil prices up over the US$80 per barrel of Brent level in the second half of 2018, Trump said in a speech before the U.N. General Assembly: “OPEC and OPEC nations are, as usual, ripping off the rest of the world, and I don’t like it. Nobody should like it,” he said. “We defend many of these nations for nothing, and then they take advantage of us by giving us high oil prices. Not good. We want them to stop raising prices. We want them to start lowering prices and they must contribute substantially to military protection from now on.” The oil markets do not yet know what Brent price level would trigger concern from Biden’s administration but it is fair to assume that it is somewhere close to this US$70-80 per barrel range (with the same floor price of US$35-40 per barrel to safeguard the shale oil sector), given the negative effect on the U.S.’s post-COVID 19 economic recovery that rising and higher trending oil prices will have.
Two and a half million barrels per day of oil coming into the global markets from Iran is certainly going to weigh on oil prices over time but it may be a lot more than this very quickly. It is wise to remember that despite the widespread but erroneous reports that Iranian crude oil exports had dropped to exceptionally low levels due to U.S. sanctions the reality was that Iran was still exporting large quantities of oil to China, as exclusively revealed by OilPrice.com. This constant stream of exports to China meant that Iran never had to shut down wells and this is why, according to industry figures, Iran pumped 2.43 million barrels per day (bpd) of crude oil in April. This said, immediately prior to the U.S. re-imposing sanctions in 2018, Iran pumped around 3.8-3.9 million bpd of crude, with realistic plans to increase this to at least 5.7 million bpd within two years of the Implementation Day for the JCPOA on 16 January 2016, although this target was shelved due to deals with Western oil companies not being finalised. Over the last two weeks, though, Iran has released various statements outlining plans to dramatically increase its oil volumes, initially very quickly from key fields in West Karoun – comprising the major fields of North Azadegan, South Azadegan, North Yaran, South Yaran and Yadavaran - which together are estimated to contain at least 67 billion barrels of oil in place. For every one per cent increase in the rate of recovery that can be achieved the recoverable reserves figure would increase by 670 million barrels, or around US$34 billion in additional revenues for Iran even with oil at US$50 a barrel. The focus on the West Karoun fields also neatly ties in to the very recent completion of the Goreh-Jask oil export pipeline.
Last week, Iranian officials stated that the Azadegan fields are top of the list of fields for further fast-track development and although officially this is to be managed by domestic Iranian companies in reality it will heavily figure Chinese companies. China National Petroleum Corporation (CNPC) is still the key foreign developer at North Azadegan, and the understanding agreed between Iran and China when France’s Total pulled out of South Pars Phase 11 was that China would eventually take over the development in exchange for which it would also be allowed to go into South Azadegan to create a unified field development programme with its North Azadegan activities. Currently, North Azadegan is producing around 80,000 bpd but the Phase 2 plan – including the spudding of the new wells – is aimed at boosting this output to at least 100,000 bpd. More specifically, China is expected by Iran to ensure that the output from North Azadegan when combined with the output from South Azadegan (currently being developed by Iranian firms) is at least 250,000 bpd. South Azadegan is now producing a steady 105,000 bpd with spikes to 115,000 bpd or so, according to Iranian oil industry sources. Longer-term, Iran’s plan is to increase the recovery rate from all of its oil fields, beginning with those in West Karoun to at least 25 per cent from the current 4.5 per cent (it was 5.5 per cent before U.S. sanctions were re-imposed). By comparison, the average recovery rate from Saudi Arabia’s oil fields is around 50 per cent, with plans to raise that to 70 per cent.