Trump Moves away from Nuke Deal with Iran, Saudi Arabia to Gain Most

Saudi Arabia appears to be gaining the most following the US President Donald Trump’s decision to walk away from Iranian nuclear deal and to re-impose sanctions on Iran. It reflects a sense of vindication by Saudi Arabia and UAE, which had pushed President Trump to take seriously Tehran's ballistic missile program and support for militant groups. That’s what the latest study by Motilal Oswal Securities Ltd felt. Interestingly, Saudi Arabia has been condemning that Iran used economic gains from the lifting of sanctions to continue its activities to destabilize the region, particularly by developing ballistic missiles and supporting terrorist groups in the region.

Crude oil prices may remain strong and state producer Saudi Aramco is also likely to be able to pump more oil to replace any Iranian barrels lost because of the re-imposed sanctions. And if these happen, Saudi Arabia clearly stands to gain. Moreover, the customers who shifted to Iran for their crude purchase, such as world’s top importer China will be forced to buy from the kingdom at higher prices.

The study report by Motilal Oswal said that this would allow the Saudis to regain market share lost since the 2016 deal between OPEC and allies like Russia, to bring down output in order to tighten global oil markets. Interestingly the financial position of Saudi Arabia has meanwhile stabilized thanks to the increase in oil prices as well as efforts to raise non-oil revenues and trim government spending. Its foreign reserves stood at $493 billion at the end of March 2018 and have been basically stable for eight months after declining steadily for nearly three years. The northward movement of oil revenues has provided the much-needed fiscal breathing space and the IMF has encouraged the government to slow the pace of tax increases and spending cuts.

Actually, Saudi Arabia wants Iran back to less than 3 million barrels a day to support higher prices.  Mind you that Israel and the US want to starve the Iranian government of money. Therefore, pulling out of the deal will allow the US to re-impose sanctions on Iran, cutting it out of the global banking system again. Going by the indications so far, Saudi Arabia may raise its oil output to offset any potential supply shortage as a result of new sanctions on Tehran, after US President Donald Trump said Washington was withdrawing from the Iran nuclear deal.

However, despite all pugnacity, not much is likely to happen for several months. Consider the indications from the US Treasury Department, which suggest that sanctions won't be re-imposed immediately, rather that it will take up to 180 days to allow oil customers and other companies in Iran engaged in doing business with Tehran to make plans. It's also not clear what sanctions will be re-imposed and in what form, with the main risk being the so-called secondary sanctions that would target companies that do business with other entities involved with Iran. Investors are speculating the amount of crude that will be wiped out and it is estimated that approximately 2,00,000-5,00,000 bpd are currently at risk.

In addition, the Motilal Oswal Securities Ltd study said crude exports from the US also have the capacity to increase as higher prices provide incentives to Shale producers to drill more wells. How buyers of Iranian crude would respond to the US decision remains uncertain. Virtually all of them, from Europe to Asia, vehemently disagree with Trump's move. It is most likely that the US will eventually be isolated and weakened in handling challenges like North Korea as Europe, Russia and China are likely to continue the deal with Iran.

Meanwhile, the US government has boosted its forecast for domestic crude output both this year. Next year, crude production is expected to be 11.86 MMbpd on an average, up from 11.44 MMbpd as projected earlier. There are indications that domestic output will average 10.72 MMbpd this year, still above 9.6 MMbpd, attained in 1970 and raised from a 10.69-MMbpd forecast in an April report.

“Given the current environment, we could experience volatility in the oil market in the near term. We are in a situation where the geopolitical premium is overshadowing the fundamentals of crude oil and driving prices higher. The extent to which US sanctions would impact Iranian oil exports remains to be seen. Although the markets were expecting such an action and had been factoring the same into oil prices, more upside from current levels cannot be ruled out. Over the medium term WTI crude oil could find support at $67-65 range and could extend the current rally towards 74-76 zone,” the report said.