Oil prices declined on Friday, backing down from multi-year highs in the previous session on hopes that supplies from alternative sources could offset the impending drop in Iranian exports due to US sanctions.
The United States is planning to re-impose sanctions against Iran, which is the producer of more than 4 percent of the total global oil supplies. The decision came after the US pulled out from a nuclear ban agreement, which was made in 2015. The agreement limited Iran’s nuclear capabilities in exchange for the removal of the US-Europe sanctions.
The re-imposition of the sanctions comes in the wake of a tightening oil market due to strong demand, particularly in Asia, and while top exporter Saudi Arabia and number 1 producer Russia are leading efforts to cut a global supply glut to spur demand and increase prices.
Brent crude futures stood at $77.34 per barrel, down 13 cents or 0.2 percent from their last close. During the previous day, Brent has reached its highest level since November 2014 at $78 per barrel.
The US West Texas Intermediate crude futures went down 7 cents at $71.29 per barrel, which is still an arm’s reach from Thursday’s November 2014 high of $71.89 per barrel.
Many analysts are expecting oil prices to jump higher as the market prepares for the imminent US sanctions and the sinking of Iran’s exports amid strong demands.
“We expect that Iranian exports will fall well before the 180-day period until oil sanctions will be in effect, similar to 2012 sanctions. We expect that around October Iranian exports will be down by 500,000 barrels per day and eventually fall by 1 million bpd in 1H19,” said US investment bank Jefferies in a note on Friday.
On the flip side, there are signs that other suppliers from the Organization of the Petroleum Exporting Countries (OPEC) will ramp up its member’s output to offset the effect of the Iran disruption.
“The market is now focused on OPEC and other producers’ ability to react to this potential supply disruption. Investors are increasingly viewing Kuwait and Iraq as producers with the best ability to raise output quickly in response to any fall in Iranian exports,” said ANZ bank.
Meanwhile, Jefferies stated that OPEC “has the capacity to replace the Iranian losses” but cautioned that “even if physical supply is held constant… the market will still be faced with a precariously low level of space capacity.”
Outside OPEC, the climbing US crude oil production may be able to fill Iran’s supply gap. The US crude oil reached another record last week, climbing to 10.7 million barrels per day. This was 27 percent higher since mid-2016. This also means that the US output is inching ever closer to Russia’s level, which is around 11 million barrels per day.