Moving Iran oil export curb from 0.5 million to a one million barrels per day (b/d) would push Brent prices up by $8 to $9 per barrel (/bbl), said the Bank of America Merrill Lynch (BofAML) in a new report.
US sanctions could prove ineffective if rising oil prices largely make up for any lost Iran volumes, added BofAML in its latest Global Energy Weekly.
Going back to 1970, the highest annual average production recorded by Saudi Arabia was 10.4 million b/d in 2016, the report noted. More recent history shows Saudi has never produced more than 10.6 million b/d on average over a single month. And even in the recent period, a steep decline in domestic Saudi oil inventories has been noted.
Thus, it appears the oil market has little confidence that Iran volumes can be easily replaced. Dealing with a new set of Iranian crude oil export restrictions would be easier if other ailing Opec+ deal members like Venezuela, Libya, Angola, Mexico, or Nigeria were able to simply maintain their production levels, the report said.
If Saudi can't fill the gap, demand may have to slow
With OECD oil inventories coming down and the oil market poised to remain in deficit, the core question here is if Saudi can fill the gap as the US increases the pressure on Iran, BofAML said.
“Alternatively, we may just face an episode of oil demand destruction, although a strong USD backdrop could set a lower oil price cap,” the report said.
“In different words, it may be hard to see Brent trading a lot higher than $100/bbl if the EUR drops to 1.12, as our FX team expects. How high could oil prices go from here? It may be complicated politics, but it is simple math.
“We estimate that every million b/d shift in S&D balances would push the oil price by $17/bbl on average. So based on those assumptions, we estimate zero Iran exports could push oil up by $50/bbl if Saudi caps out. We expect in this game of chicken, someone will blink before that happens.”
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