Fitch: Sanctions on Iran to affect oil supply balance

By Gokhan Kurtaran

LONDON

The reinstatement of U.S. sanctions against Iran and the resulting potential sustained loss of Iranian exports increase the chances that the global oil supply-demand balance remain in deficit in 2018-2019, Fitch Ratings has said.

“This means that Brent oil prices may remain above 70 US dollars for some time, partly reflecting the geopolitical risk premium that has come back into the prices. However, we believe these high oil prices may not be sustained for long, assuming: most global oil producers have broadly adjusted to the 50-60 US dollars range and rising US shale production,” the credit rating agency said in the press note released on Thursday.

“The ultimate consequences for the oil market and prices are difficult to predict since the currently high level of oil prices and the threat of an oil deficit could prevent OPEC+ from reaching a consensus and extending the production cuts deal in its existing form into 2019,” Fitch said.

“The dynamics of oil production in Iran will be one of the key factors driving the global oil supply-demand balance in the medium term. Iran ramped up production significantly from 2.8 million barrels per day in 2015 to around 3.8 million barrels per day in 2017 after sanctions were lifted in late 2015. To put this into context, the OPEC+ countries agreed to cut production by 1.8 million barrels per day relative to the October 2016 level."

Fitch said that the Iranian production was unlikely to decline immediately as sanctions will be reintroduced at the end of the 180-day wind-down period applicable for petroleum-related activities.

“Moreover, Iran may attempt to increase its production and exports now before the sanctions have been put into force. Oil prices have increased following the US announcement, albeit not dramatically as this move had been widely anticipated and had been factored into the elevated prices in the period preceding the announcement.”