Oil prices are up about $12 over the last month and change and a hefty $26 over the last year. A number of fundamental factors is driving the steep rise in prices. For instance, strong economic growth is fueling a rise in demand. Indeed, the International Energy Agency predicts global oil demand will hit 100 million barrels per day (bpd) by the end of this year. That would be the highest demand on record.
Conversely, supplies are at risk due to a number of exogenous events driven by President Trump. The most prominent risk is a collapse of Iranian crude production due to the Trump administration’s sanctions.
The US government is hell-bent on completely shutting Iran out of the market and it’s already having some success. Iranian oil exports have plunged about 35% since sanctions were announced in April. Moreover, a number of key Iranian oil importers like Japan, South Korea, and India have indicated they may stop buying from Iran altogether. That could mean a hefty 1.6 million bpd of crude could fall out of the market in the coming months.
President Trump’s Sanctions to Hurt Venezuelan Oil Production
The Trump administration is also targeting President Maduro’s regime in Venezuela. President Maduro has suppressed all opposition and his regime has gutted the country’s economy through epic mismanagement. This has already greatly weakened the petroleum industry and knocked down production.
However, President Trump seems intent on putting the coup-de-grace to Venezuela’s anti-American, socialist regime. To that end, the US Treasury Department has sanctioned numerous people in the regime. These sanctions don’t specifically target the petroleum industry. But they do reinforce the capital and talent flight from Venezuela and will continue to put downward pressure on oil production.
Indeed, OPEC estimates Venezuela produced 1.278 million barrels per day in July. That’s less than half the 2.6 million bpd it was producing in 2015. Moreover, analysts expect Venezuela’s oil production to fall to below 1 million bpd by the end of 2018.
Trump’s Attempt to Keep Oil Prices Low Could Backfire
President Trump has tried to offset the loss of crude from Iran and Venezuela by trying to persuade Saudi Arabia to open up the taps. To that end, he called Saudi King Salman last week.
However, both Saudi Arabia and Russia have pushed back on the request. They’ve indicated that the oil market is currently well-supplied. However, they’ve also indicated that they have 2.2 million bpd of spare capacity that they could bring online if necessary
The problem for the market is that this back and forth is creating uncertainty for marginal producers in the US shale petroleum industry. These companies need to be confident oil prices will sustain themselves before they start making the sizable capital expenditures necesssary to ramp up production.
This is confirmed by the fact that the number of oil rigs drilling in the US actually declined by 3 last week. Moreover, US production has more or less stalled around 11 million bpd since July.
This won’t change until prices rise on a sustained basis. Accordingly, oil prices rising to $100 a barrel is a real possibility as many producers won’t get off the sidelines without the necessary price signal.