How could Trump’s refusal to renew waivers affect oil market?

Oil&Gas Materials 21 January 2019 14:17 (UTC +04:00)

Baku, Azerbaijan, Jan.21

By Leman Zeynalova – Trend:

While the bulk of growth in 2019 still stem from non-OPEC sources, every black swan on the supply side relates to an OPEC member, Trend reports citing Fitch Solutions Macro Research (a unit of Fitch Group).

“Social and political instability and heightened security risks are common threads. With the exception of the breakdown in relations between Saudi Arabia and Russia, all of them pose downside risks to supply and so upside risk to prices. This is in stark contrast to the demand side, where the risks are largely economic in nature and – with the exception of the IMO 2020 – which would all put downward pressure on Brent,” said the report released by Fitch Solutions.

The company said that following the decision by OPEC+ to cut production, the market’s focus is again shifting to broader macroeconomic conditions and the headwinds they pose for oil demand.

“ Beijing and Washington take centre stage and their ongoing trade dispute has the potential to move the needle of global GDP growth in the coming year. Less attention is being given to developments in India, despite the fact that it is set to overtake China as the main driver of global demand growth. We maintain a bullish outlook on demand, given the supportive fundamentals of the Indian domestic market. That said, some red flags are being raised in the country’s banking sector, as non-performing loans rise and credit growth shrinks. The central bank is struggling to stimulate lending, while maintaining macro-prudential policy,” said the report.

Moreover, the company analysts point out that a slowdown in developed market demand is widely anticipated.

“The outlook for these markets is structurally bearish, due to shifting demographic and economic fundamentals, rising energy efficiency and accelerated fuel-s witching. Low oil prices and strong demand in the US has supported DM demand in recent years , but these tailwinds have begun to fade, with demand growth in most DM markets lapsing into negative territory this year. A slowdown in the US is baked into prices, but the EU – in which demand has already fallen off sharply in recent months – could surprise to the downside.”

On the supply side, the most probable is that Trump administration declines to renew waivers in May, driving Iran’s exports down to low or near zero levels, according to the report.

“From current levels, this implies the loss of around a further 1.0mn b/d of oil from the market. On paper, the impact of this on the market should be relatively severe. However, it is unlikely that President Trump will push for zero exports, if it risks spiking up prices, given the strains this would place on the domestic US consumer.”

Under any scenario, US sanctions will continue to pressure Iran economically and politically, according to the report.

US President Donald Trump declared Washington’s withdrawal from the nuclear deal with Iran in May 2018. Trump also announced the restoration of all sanctions against Iran, including secondary ones against other countries doing business with Iran. The United States re-introduced part of the sanctions against Iran on August 7, 2018, while the second batch of the sanctions came into effect on Nov.5, 2018.

The US government has agreed to let eight countries, including South Korea and Japan, as well as India, keep buying Iranian oil after it reimposes sanctions on Tehran. The waivers have been granted for six months.


Follow the author on Twitter: @Lyaman_Zeyn