Record US, Russian Output Plus Relaxation of Iran Sanctions Further Support Crude Market Surplus

Russia's output in the biggest in 30 years.

With the beginning of November, analytical worries about a market tightening due to the U.S. sanctions against Iran seem to be almost forgotten, and putting the matter even further to rest are reports of huge U.S. and Russia output surges - as well as the disclosure that American president Donald Trump has granted eight countries leniency in buying Iranian oil.

John Kemp, commodities analyst for Reuters, noted that U.S. crude oil production is rising at the fastest rate on record: "Crude output has increased by more than 2 million barrels per day [bpd] over the past 12 months, an absolute increase that is unparalleled in the history of the U.S. oil industry.

"In percentage terms, output is up by nearly 25 percent over the last year, the fastest increase since the 1950s."

Meanwhile, Russia's crude and condensate output averaged 11.412 million bpd in October, according to data from that country's energy ministry, about 160,000 bpd more than two years ago and just shy of its highest-ever output of 11.416 million bpd, which was posted in 1987 during the Soviet era.

If that wasn't enough to convince skeptics that producing nations are more than capable of holding their own against Iranian losses, Trump on Friday sent shock waves through the analytical community that prefers to rely on geopolitics rather than numbers to assess the state of the crude market, by agreeing to let eight countries - including Japan, India, and South Korea - keep buying Iranian oil after the U.S. reimposes sanctions on the Islamic republic next week.

According to an unnamed U.S. administration official, the waivers are only temporary, and the U.S. will expect countries that receive them to keep cutting Iranian imports in the months ahead; Robert Palladino, deputy State Department spokesman, said, "We're quite confident moving forward that the actions that are being taken are going to help us exert maximum pressure against the Iranian regime.

"This leading state sponsor of terrorism is going to see revenues cut off significantly that will deprive it of its ability to fund terrorism throughout the region."

Mainstream news outlets - the bulk of whom have expressed their dislike of Trump in no uncertain terms - viewed this latest development as an about-face, but it fell upon Ellen Wald, president of Transversal Consulting, to explain his tactics to those who have not followed his decades of business deals or read his books.

Writing in Bloomberg, she pointed out that the brash billionaire's approach to achieving success is to initially act harsh and aim for an unrealistic expectation, thus causing chaos and uncertainty, then dial back the hostility and move in to negotiate a more reasonable outcome.

She wrote, "Not only will the exemptions keep some important U.S. allies happy, but by keeping more Iranian oil on the market than previously expected, the administration helps prevent oil prices from rising too high, so American consumers do not suffer from price shock."

However, she added that "If the Trump administration wants to cut off Iran's revenue to the point where the Iranian government cannot afford to fund military and terrorist activity abroad, it will have to keep up the pressure on Iran's customers; exemptions will need to be re-evaluated monthly, with accurate data on Iran's crude oil and condensates exports."

It's unclear when the analytical community made the fundamental shift from worrying about market tightening to market oversupply, but a possible catalyst was unleashed a week ago by the Organization of the Petroleum Exporting Countries, which stated its concerns about an oversupply in 2019 that could cause them to return to their output cutbacks.