In its latest, monthly oil production update, OPEC reported that its crude oil output increased by another 240,000 barrels a day in October to 33.64 million barrels a day, a new record high, with Nigeria, Libya and Iraq driving the supply boost and with total production about 1 million barrels higher than the plateau agreed upon in Algiers at the end of September.
As a result of OPEC’s relentless increase in total output, the cuts OPEC would needs to enforce to reach the Algiers output target just get bigger and bigger…
… most of its as a result of soaring Iranian oil exports – by roughly 1 million bpd – since the easing of sanctions by the Obama administration:
It is also the reason why oil has continued to slide in recent weeks, as the upcoming OPEC production cut (or even freeze) – which will have to be shouldered almost entirely by Saudi Arabia due to production cut exemptions granted to other states, most notably Iran – has lost almost all credibility with the market.
However, suddenly there is a ray of hope in OPEC’s dark world, and it comes courtesy of president-elect Donald Trump, who just may eliminate as much as 1 million barrels of OPEC oil output, or the cartel’s entire excess production, should he undo the deeply unpopular within GOP circles Iran nuclear agreement, which would also collapse Iranian oil exports and send the price of oil surging.
Recall that Trump’s stated number one priority from his pre-election circuit has been to dismantle the “disastrous” Iran deal – although as Bloomberg notes, his to-do list might have changed since saying that back in March. And, as Bloomberg’s Julian Lee calculates confirming our math from just right after the Algiers (non) deal, tearing up the Iran nuclear agreement would remove almost a million barrels a day of supply at a stroke: a million barrels is about the same size as the cut OPEC needs to make.
The next question: can Trump actually undo Obama’s landmark Iran nuclear agreement? According to Lee, the answer is yes, “despite assertions to the contrary from Iran’s President Rouhani and a slew of analysts.” Here’s how:
The Joint Comprehensive Plan of Action, as the deal is snappily titled, wasn’t ratified by Congress, but brought into force by President Obama via executive order. Trump could rescind that. The fall-out would be messy, but it could be done (in theory).
There’s another way too, enshrined within the agreement itself. The dispute resolution mechanism allows any signatory to refer a perceived breach of the deal’s terms to the joint commission created to oversee the accord. If the complaining party isn’t satisfied with the outcome and believes the breach constitutes “significant non-compliance”, it can refer it to the U.N. Security Council. The Security Council would then vote — and here’s the killer blow — – not on whether to re-impose sanctions, but on whether to “continue the sanctions lifting.”
That might not sound like a big difference, but it’s critical. By framing the vote this way, the U.S. could, in theory, veto the resolution. All the U.N. sanctions on Iran would then be re-imposed.
Should Trump proceed down this path, it would leave only EU sanctions, which prohibited the importing of Iranian oil into EU countries. And while one might expect a European backlash against unwinding the deal – after all it would remove much of the marginally cheapest oil available to European refiners – it may not be very effective, because as BBG adds, “the tortuous process of re-establishing Iran’s oil trade with Europe shows that only too clearly.”
Although there were willing buyers and a very willing seller, the difficulty came in finding insurers who would underwrite the transactions, or shippers to carry the crude. All the big re-insurers had at least some U.S. involvement and they were extremely hesitant to pick up the business — even with the apparent backing of the Obama administration. They would drop the business like a scalding hot potato if the new president killed the deal. End of Iranian oil flows to Europe.
it wouldn’t be just Europe: Asian buyers, who in the past were threatened with the loss of access to the U.S. banking system to persuade them to cut their purchases of Iranian, promptly abandoned Tehran supplies. They likely would again.
Sure, there would be a reciprocal response, as any attempt to end the deal by Trump would prompt Iran the retaliate and abandon its own commitments. Coming shortly before Iran’s presidential election in May, it would be a huge boost to Tehran’s hardliners. In Bloomberg’s estimates, “you’d expect life to become more difficult for the Americans in Iraq, where it’s engaged alongside Iranian-backed militias in ousting Islamic State from its last stronghold in the country – another Trump priority.”
Ironically, such an act by Trump would make him Saudi Arabia’s best friend overnight: should the president-elect remove the burden from the Kingdom to cut its own production by as much as 1 million bpd and shift it to Iran, whose output would be forcibly cut, the Saudis would not only preserve their market share, but enjoy immensely as the price of crude soars back into the mid to upper $50-range. As such, it is unclear if Trump would enjoy being perceived as a firmer hardliner on Iran, yet one who indirectly helps support the nation that has been the most vocal supporter of the Clintons, Saudi Arabia.
Finally, and speaking of the public, any escalation between the Trump administration and Iran which would send oil prices higher, while great for U.S. oil, would be frowned upon by US motorists, who would have to pay more at the pump. The decision who to please will ultimately be Trump’s to make.
Truth Has A Liberal Bias on Sun, 13th Nov 2016 1:36 pm
Why America begs the world for higher energy prices is beyond me. Probably because Wall Street likes the idea. It certainly won’t help the average American. America can’t even figure out its own best interest anymore.
rockman on Sun, 13th Nov 2016 1:52 pm
The amount of oil and its products consumers buy is a function of what the can afford. Reducing the volume of oil produced doesn’t increase what consumers can pay. If cutting the volume increases prices significantly then fewer consumers will be able to buy oil and demand decreases. Fewer buyers means more competition by the sellers. Which is what brought prices down in the first place.
So is taking Iranian oil out of the market place (except, of course, the oil China was buying by skirting sanctions) going to increase demand? IOW forcing buyers to pay a higher price for oil then they are able/willing to pay?
penury on Sun, 13th Nov 2016 3:15 pm
Every propaganda piece like this since the election has attempted to point out how terrible Trump could be. Sorry people he won, your team lost. Go play with your “play-doh”
onlooker on Sun, 13th Nov 2016 3:20 pm
But Rock “Reducing the volume of oil produced doesn’t increase what consumers can pay.” Will it not decrease what consumers can pay by weakening the Economy ?
rockman on Sun, 13th Nov 2016 3:27 pm
Looker – You know me: I try to avoid predicting. But you could be correct. Between the dynamic being so complex and the lag time so long some feedback loops it’s often difficult to explain why things happened in the past let alone in the future.
onlooker on Sun, 13th Nov 2016 3:37 pm
thanks Rock. Your comments are always valuable. Hope your some relief from the heat in Texas
onlooker on Sun, 13th Nov 2016 3:37 pm
getting some
Northwest Resident on Sun, 13th Nov 2016 3:41 pm
“Will it not decrease what consumers can pay by weakening the Economy?”
Short, honest answer: Absolutely!
Exponentially increasing population pushing against rapidly depleting resources of all kinds and most especially oil is a drop-dead guarantee that economic activity will be LESS, not the same and certainly not more.
Predictions are treacherous, especially when those predictions are of what might happen in the future. But when you’re trapped on a passenger jet and the fuel has run out and there is no land in sight and you’re plummeting downward at ever increasing speeds, THEN it is safe to make a prediction as to what the near-term future will be.
rockman on Sun, 13th Nov 2016 3:51 pm
“Hope your some relief from the heat in Texas” We’re in the middle of the typically nicest 2-3 months of weather we get in Texas: 50’s at night and low 70’s in the day. Growing up in S La I got over getting upset with heat in my pre-AC childhood. OTOH my really big relief now is not hearing my Yankee wife always bitching about the heat. LOL. Seriously. I have a small gen and a 110 room AC unit for emergencies in the summer. I put her in one bedroom while the dogs and I sleep downstairs. She really isn’t good company at times like that. LOL.
rockman on Sun, 13th Nov 2016 4:15 pm
Great analogy NR. And when the 10 folks on board see there’s only 5 parachutes is when things get really ugly…and dangerous. Tough for many to prepare themselves mentally for such times.
True story: long ago a buddy was going thru SEAL training. One exercise seemed simple: 5 of them in a simulator of a sub escape chamber. Equipped with 5 rebreathers. Except unknown to them two weren’t functional. And once flooded the escape hatch wouldn’t open. They were monitored so it wasn’t likely anyone would drown. But that’s not how the human mind works when put under sudden threat. And they did figure out how to share. What the instructor wanted to see was the initial gut reaction.
Hypothetical: a lot of ME oil exports get shut down for whatever reason for an extended period of time. What’s the gut reaction of our civilized and well armed societies? Even if it doesn’t lead to military conflicts the initial reactions might not be much to be proud of.
Could be as bad as George on Seinfeld knocking down the old lady when he thought the apartment was on fire. LOL.
Northwest Resident on Sun, 13th Nov 2016 5:03 pm
rockman — Nice story, and I’m glad to know those SEAL recruits figured it out. That is inspirational. I know I’m hitting on all cylinders when I’m in agreement with you. When I’m not, I have my doubts. But oil depletion and its consequences are so obvious to me — I see it as clearly as the laptop screen I’m typing on right now — I know that on this topic that I’m standing on firm ground, even if I see the rockman getting skittish and wavering in his one hundred percent commitment to the undeniable reality sometimes.
mx on Sun, 13th Nov 2016 5:41 pm
Trump has walked back that Iran talk.
And this article doesn’t mention Russian increases in oil production, and it’s currency devaluation, that makes their product more competitive.
mx on Sun, 13th Nov 2016 5:46 pm
The oil industry knows they can push gas to $3.50 a gallon with no issues.
But, with increased production from Russia, weak demand from China, and increased production from Iran, there’s too much oil on the market.
The first to leave( as in driven out of business ) should be the Tar Sand Projects.
shortonoil on Sun, 13th Nov 2016 8:59 pm
With a market that is already oversupplied by 5.5 mb/d, that is like pissing into the wind. They will have $50/barrel until the market realizes that the inventory isn’t going down. That should take about 6 hours.
Boat on Sun, 13th Nov 2016 10:12 pm
The market is not oversupplied by 5.5 my/d. Neither Brent or WTI is at $50. You have the credibility of Geopressure.
rockman on Sun, 13th Nov 2016 10:45 pm
NR – “…even if I see the rockman getting skittish and wavering…” Don’t hesitate to call me out of you think I’m wandering off the path. Always value your points of view.
mx – I’m confused: first you say we “…can push gas to $3.50 a gallon…”. And then you say just the opposite explain why we can’t. So which is it?
mx on Mon, 14th Nov 2016 8:52 am
OMG, Trump may open up Arctic Drilling.
Again, more supply.
These guys are actually oil’s enemy.
Revi on Mon, 14th Nov 2016 9:30 am
Good luck with the price of oil going up. For now it’s going down. The etp model says that the maximum price for oil will be around $40 next year, and it’s going to be about 12 by 2020. Good luck getting oil at that price! We are going to be walking anyway.
Dredd on Mon, 14th Nov 2016 9:36 am
Only if Oil-Qaeda orders him to (Dear Donald … Duck!).
They may want to take the S.Ct. first (Hansen v Obama)
Boat on Mon, 14th Nov 2016 9:58 am
Revi,
Thousands of companies and hundreds of billions invested apparently disagree with the etp model.
Revi on Mon, 14th Nov 2016 10:00 am
Maybe there will be a new peak this year. We’ll see. When we fall off the plateau it’s going to be a steep descent.
dave trhompson on Mon, 14th Nov 2016 10:02 am
President elect Trump is beholden to the system. This man like all before in the never ending schearaed we call democracy, will be manipulated by the puppet strings firmly attached to all levels of corporate/government fascism. Trump is the perfect corporate ruse.
Boat on Mon, 14th Nov 2016 10:15 am
Revi,
Lol, you missed the new peak last month. Don’t worry, there will be another.
rockman on Mon, 14th Nov 2016 10:19 am
“Trump may open up Arctic Drilling.” ???
FYI…recent Arctic activity:
In 2008 Shell alone spent over $2 billion acquiring Chukchi Sea leases in a record-breaking federal lease sale. The company conducted two drilling seasons, in 2012 and 2015, and did so with drillinb permits approved by President Obama’s administration.
And just this year: the federal government moved ahead with plans to lease big new reserves by 2022, including three untapped seams in Alaskan waters. Though President Obama has restricted drilling in a portion of the Arctic waters, and delayed (not banned) Arctic drilling for two years, he continues to move forward with the lease sales.
Most likely if anyone strikes Arctic oil when President-elect Trump is in office it will happen on a lease awarded by President Obama.
FYI…old Arctic history:
In 1988 in the OCS 109 sale the govt offered 4,700 leases in the Chukchi Sea in the Arctic of which 350 were granted covering 2 MILLION ACRES.
So bizarre to see so many folks who think hunting for oil in the US portion of the Arctic is something new.
And in case you missed it both Russia and Norway have been producing oil in the Arctic for a while. In fact the Norwegians get the bragging rights for the northernmost oil production on the planet.
rockman on Mon, 14th Nov 2016 10:31 am
Revi – You seem to be up to speed on the model so I’ll ask the same I just did of my buddy mak. BTW you say $12/bbl by 2020 while others say $20/bbl. What is the actual prediction? Either way I have the same question:
“I’m still looking for anyone’s projection of oil prices between now and $20/bbl ($12?) in 2020. No need for great detail…just every 6 months: June 2017; Jan 2018; June 2018; Jan 2019; June 2019; Jan 2020. Oh, wait, don’t need that last one…it will be about $20/bbl ($12?) then. This should be easy, right? Can’t you just pluck those 5 data points from the model? After all anyone can say prices will crater and the “end of the oil age” is close. But with the model you have actual numbers we can track, right?”
Thanks in advance.
Cloud9 on Mon, 14th Nov 2016 11:42 am
When a business starts to go under, it is forced to sell product at garage sale prices. Is that what you guys are predicting?
rockman on Mon, 14th Nov 2016 2:50 pm
Cloud – Different folks are predicting a variety of scenarios. But “…it is forced to sell product at garage sale prices.” Whether a company is going under or doing great the vast majority are forced to sell at whatever the market price might be. Over 4 decades I’ve not seen any company sell its oil at a price it chose. They sold at the market price because that was the only option to generate cash flow. Companies seldom have more then 2 or 3 potential local buyers so there isn’t nearly as much competition as many believe. I’ve seen much oil sold at “bargain basement prices” as you say. Like $17/bbl in 1998. But even that was for good quality oil: I did some consulting for a small operator that sold his high sulfur oil for $6/bbl that year.
And it makes little difference if the sales prices allows the initial investment to be recovered 100% or not. The cost to drill and produce an oil well has never affected the price of oil. Just the opposite: the price of oil controls how much a company will spend to drill. As was obviously witnessed by the number of drilling rigs that shut down when oil prices collapsed.
It doesn’t matter if every company today or in 2020 is solvent and doing OK. If the market price in 2020 is $20/bbl or $100/bbl most companies would sell as much as possible. Just as we see today: the KSA isn’t choosing to sell oil at the current price to hurt anyone. In fact no single oil producer has been damaged as badly by the lower price as the Saudis. They can’t force the buyers to pay more then market price. All the KSA can do to max cash flow is to increase its production rate as high as possible. Which is exactly what they’ve been doing.
They could unilaterally cut production like it did in the 80’s. Not only did that NOT return prices to the previous high level they were on track to shut in 100% of its production in another 18 months. So they opened the valves to increase cash flow (exactly as they’ve done recently) and knocked prices down to around $13/bbl in 1986. But they learned their lesson which is why they have no intention of reducing production unless all the other major producers also do the same.
Davy on Mon, 14th Nov 2016 3:19 pm
Good news!
http://www.zerohedge.com/news/2016-11-14/putin-calls-trump-discuss-renormalization-us-russian-relations