Crude Surges Due to End of Iran Waivers, but Figures Suggest There's No Cause For Panic

Monday April 22, 2019

It is unclear what the far-reaching impacts the White House's decision to end waivers for Iran oil imports will be, but the announcement on Monday sent shock waves through the trading community, which caused crude prices to jump over 2 percent to a near six-month high.

Brent rose $2.07, or 2.88 percent, to settle at $74.04 per barrel, having earlier reached $74.52, the highest since November 1; West Texas Intermediate crude futures climbed $1.70, or 2.66 percent, to settle at $65.70 per barrel, having earlier hit $65.92 - the highest since October. 31.

The gains were a reaction to Washington stating it will eliminate in May all waivers allowing eight economies to buy Iranian oil without facing U.S. sanctions, a move secretary of state Mike Pompeo said was designed to bring down Iranian oil exports to zero.

John Kilduff, founding partner at Again Capital, noted that "The geopolitical risk premium is back in the oil market, in a big way: most, if not all, legitimate commercial interests will avoid Iran oil purchases.

"Iran's flow will be reduced to a trickle."

Monday's events solidified the notion, kindled last week among analysts, that the global crude market is tightening due to losses not only from Iran but also Venezuela and Libya, and exacerbated by a perception of weakening demand due to waning economies.

Experts cited at least one country that would be hard-hit by high oil prices: Daryl Liew, head of portfolio management at Reyl Singapore, told CNBC television that "I think India is probably one of the key potential countries that might suffer from a higher oil price, in terms of their current account deficit, for example; and that's going to be basically putting pressures on inflationary pressures as well."

However, the events also obfuscate the equally compelling argument that demand remains robust (fresh data seems to suggest that worries about China's economy may have been misplaced) and several countries, most notably the U.S. and Russia, are poised to produce record amounts of output.

Plus, three of the eight countries that received the White House waivers - Greece, Italy, and Taiwan - have already cut their imports from Iran to zero, meaning the expiry date of May may not be as calamitous as some analysts fear.

Another powerhouse producer, Saudi Arabia, appeared to take the White House's announcement on Monday in stride: Khalid al-Falih, energy minister for the kingdom, stated that his country "will coordinate with fellow oil producers to ensure adequate supplies are available to consumers while ensuring the global oil market does not go out of balance."

For its part, Bloomberg pointed out that the Saudis and the United Arab Emirates "can increase their combined production by about 1.5 million barrels per day within a short period....the additional oil would more than compensate for losses from Iran, which shipped about 1.1 million barrels a day of crude and condensate in the first half of April."