Trump’s decision in early May to withdraw from the deal that curbed the Iranian nuclear program in exchange for the lifting of sanctions has resulted in a contraction of foreign investments in Iran and in a massive devaluation of the country’s local currency, the rial.
Protests and a weak economy in Iran
The Iran rial appears to be 50% weaker over the last weeks and is trading about 85000-90000 to one US dollar. In April it was 57500 rial to one US dollar and even at the beginning of June it was about 65000 rial to one US dollar.
Iran is not economically stable.
Iran’s perpetually high misery index (inflation 12% + Unemployment 10% = 22% Misery index)
There are protests of bazaar traders and protests from truck drivers, teachers, laborers, and protests about pollution and the lack of water.
Read: https://www.nextbigfuture.com/2018/06/i ... ttack.html
Iran: Life is going from bad to worse
Iran: Life is going from bad to worse
Dan Steffens
Energy Prospectus Group
Energy Prospectus Group
Re: Iran: Life is going from bad to worse
I am now a "Pen Pal" with John Kemp. He is based in London and writes for Reuters. Below is from an email that he sent me on Sunday after seeing news of Trump's tweet about talking to Saudi Arabia.
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Some informal reflections on the United States, Saudi Arabia and Iran sanctions -- I will work this up into a proper column when I am back in the office on Monday:
The White House can drive Iran’s oil exports to zero, or it can have moderate U.S. gasoline prices, but it probably cannot have both.
The awkward tension between the administration’s foreign policy priority (tough Iran sanctions) and its electoral calculation (keep gasoline prices low) explains its increasingly strident interventions in the oil market.
President Donald Trump has already blamed the Organization of the Petroleum Exporting Countries (OPEC) for the sharp rise in oil prices that has pushed average U.S. gasoline prices close to $3 per gallon. “Looks like OPEC is at it again,” the president wrote in a message on Twitter on April 20. “Oil prices are artificially Very High! No good and will not be accepted!”
Under pressure from the United States, as well as the continued rise in oil prices, OPEC and its allies agreed on June 23 to boost production by an implied 1 million barrels per day with effect from the start of July.
Saudi Arabia is expected to provide most of the increase, with smaller contributions from the United Arab Emirates, Kuwait and Russia, though specific country allocations were not included in the accord.
But the agreement failed to bring prices down and senior U.S. officials have since indicated they want an even larger increase to dampen the market.
The president has now weighed in by pressing Saudi Arabia for a much bigger increase in oil production, with another message on Twitter on June 30:
“Just spoke to King Salman of Saudi Arabia and explained to him that, because of the turmoil & disfunction in Iran and Venezuela, I am asking that Saudi Arabia increase oil production, maybe up to 2,000,000 barrels, to make up the difference,” the president wrote. “Prices to high! He has agreed!”
Saudi Arabia’s official news agency confirmed the phone call though it made no mention about volumes of extra oil.
According to the Saudi Press Agency: “The two leaders stressed the need to make efforts to maintain the stability of oil markets, the growth of the global economy, and the efforts of producing countries to compensate for any potential shortage of supplies”.
The White House has also softened its position about extra barrels in an official statement that came out several hours after the president's tweet.
Statement from the press secretary on the president’s conversation with the king of Saudi Arabia”, White House, June 30. “The two leaders agreed that balancing the energy market is essential,” according to the White House press office readout. “In response to the President’s assessment of a deficit in the oil market, King Salman affirmed that the Kingdom maintains a two million barrel per day spare capacity, which it will prudently use if and when necessary to ensure market balance and stability, and in coordination with its producer partners, to respond to any eventuality.”
SPARE CAPACITY
In contrast to the Obama administration, which employed sanctions to reduce Iran’s oil exports gradually, the Trump administration has made clear it wants to see Iran’s oil exports fall to zero from November.
In a press briefing on June 26, a senior State Department official repeatedly stated the administration wants U.S. allies as well as India and China to cut imports from Iran to zero and does not plan to issue waivers.
So far in 2018, Iran has been exporting over 2 million barrels per day (bpd) of crude and condensates, according to the Joint Organizations Data Initiative.
The problem is that the total amount of unused and available spare capacity held by OPEC members was just 3 million bpd at the end of May, according to the International Energy Agency.
Most of the remaining spare capacity is in Saudi Arabia (2 million bpd) with smaller volumes in Iraq (330,000 bpd), United Arab Emirates (330,000 bpd) and Kuwait (220,000 bpd).
Russia also has the capacity to increase output by several hundred thousand barrels per day over the next six months, but spare capacity elsewhere is negligible.
Saudi Arabia, United Arab Emirates, Kuwait and Russia have already pledged to boost their combined output by 1 million bpd from July, which will leave just 2 million bpd of spare capacity left.
If Iran’s exports were pushed close to zero from November, and Saudi Arabia and its allies step up their own production to fill the gap, remaining spare capacity will fall to 1 million bpd or less by the end of 2018.
The volume of spare capacity has not fallen that low since 2004 and before that the first U.S.-Iraq Gulf War in 1991.
But if the level of spare capacity is adjusted for the increase in consumption, it will be at the lowest level since the oil shocks of 1973/74 and 1980/81.
SHOCK ABSORBERS
The oil market relies on a set of shock absorbers to help manage variations in production and consumption and ensure the smooth flow of oil from wellhead to consumer.
In rough order of availability, these shock absorbers are:
* Commercial inventories (including floating storage)
* OPEC spare capacity
* OECD strategic stocks
* Short-cycle oil production (shale and development within existing oil fields)
Most of these shock absorbers have now become seriously depleted as a result of the recent tightening of the oil market.
Commercial inventories have fallen below the average of the last five years and are much tighter if adjusted for the increase in consumption since 2013.
Relative tightness of commercial crude and products stocks is reflected in the backwardation in oil futures contracts.
If Iran’s exports are eliminated entirely, and Saudi Arabia and its allies step up their own production to compensate, the OPEC spare capacity shock absorber will also disappear.
The market will then rely on OECD strategic stocks and increase in short-cycle oil production to meet any further disruptions of supply or unexpectedly fast growth in consumption.
Stock releases from the U.S. Strategic Petroleum Reserve and other IEA members could help ease future shortages and calm prices but only as a temporary measure.
Inventory releases (which are a one-time adjustment in stock levels) cannot offset an ongoing disruption in production (which is a flow problem).
In the medium term, the market would have to rely on an increase in short-cycle production to cover any remaining production-consumption gap.
Short-cycle producers, especially U.S. shale firms, could raise their output but their response will be limited by the lack of available pipeline capacity.
The total supply situation (actual and forecast production, plus inventories and spare capacity) is now largely fixed for 2018/19.
TOUGH CHOICES
The oil market is already at a relatively late stage in the cycle, when prices tend to rise to stimulate faster production growth and moderate consumption growth.
Other things being equal, prices are more likely to rise than fall over the next two years, assuming the global economic expansion remains on track.
If the Trump administration takes a tough line on sanctions and attempts to push Iran’s oil exports close to zero, it will be removing a further 2 million bpd of production from a market that is already likely to be very tight.
The most likely outcome is that prices will rise to cut consumption growth and rebuild the spare capacity and inventory shock absorbers to a more comfortable level.
The almost inevitable consequence is a further increase in gasoline and diesel costs and/or a slowdown in the global economy to curb consumption growth – perhaps as a result of the oil price increase or rising trade tensions.
Markets have fundamental constraints of their own quite distinct from politics. No matter how much it presses Saudi Arabia to boost oil supplies, the White House cannot escape from this logic.
The administration can have tough sanctions on Iran that cut its oil exports close to zero, or it can try to stabilise gasoline prices, but it probably cannot do both.
The most likely outcome is a compromise that sees some Iranian exports continue, while prices increase, but not as much as under a zero exports scenario.
------------------------
Some informal reflections on the United States, Saudi Arabia and Iran sanctions -- I will work this up into a proper column when I am back in the office on Monday:
The White House can drive Iran’s oil exports to zero, or it can have moderate U.S. gasoline prices, but it probably cannot have both.
The awkward tension between the administration’s foreign policy priority (tough Iran sanctions) and its electoral calculation (keep gasoline prices low) explains its increasingly strident interventions in the oil market.
President Donald Trump has already blamed the Organization of the Petroleum Exporting Countries (OPEC) for the sharp rise in oil prices that has pushed average U.S. gasoline prices close to $3 per gallon. “Looks like OPEC is at it again,” the president wrote in a message on Twitter on April 20. “Oil prices are artificially Very High! No good and will not be accepted!”
Under pressure from the United States, as well as the continued rise in oil prices, OPEC and its allies agreed on June 23 to boost production by an implied 1 million barrels per day with effect from the start of July.
Saudi Arabia is expected to provide most of the increase, with smaller contributions from the United Arab Emirates, Kuwait and Russia, though specific country allocations were not included in the accord.
But the agreement failed to bring prices down and senior U.S. officials have since indicated they want an even larger increase to dampen the market.
The president has now weighed in by pressing Saudi Arabia for a much bigger increase in oil production, with another message on Twitter on June 30:
“Just spoke to King Salman of Saudi Arabia and explained to him that, because of the turmoil & disfunction in Iran and Venezuela, I am asking that Saudi Arabia increase oil production, maybe up to 2,000,000 barrels, to make up the difference,” the president wrote. “Prices to high! He has agreed!”
Saudi Arabia’s official news agency confirmed the phone call though it made no mention about volumes of extra oil.
According to the Saudi Press Agency: “The two leaders stressed the need to make efforts to maintain the stability of oil markets, the growth of the global economy, and the efforts of producing countries to compensate for any potential shortage of supplies”.
The White House has also softened its position about extra barrels in an official statement that came out several hours after the president's tweet.
Statement from the press secretary on the president’s conversation with the king of Saudi Arabia”, White House, June 30. “The two leaders agreed that balancing the energy market is essential,” according to the White House press office readout. “In response to the President’s assessment of a deficit in the oil market, King Salman affirmed that the Kingdom maintains a two million barrel per day spare capacity, which it will prudently use if and when necessary to ensure market balance and stability, and in coordination with its producer partners, to respond to any eventuality.”
SPARE CAPACITY
In contrast to the Obama administration, which employed sanctions to reduce Iran’s oil exports gradually, the Trump administration has made clear it wants to see Iran’s oil exports fall to zero from November.
In a press briefing on June 26, a senior State Department official repeatedly stated the administration wants U.S. allies as well as India and China to cut imports from Iran to zero and does not plan to issue waivers.
So far in 2018, Iran has been exporting over 2 million barrels per day (bpd) of crude and condensates, according to the Joint Organizations Data Initiative.
The problem is that the total amount of unused and available spare capacity held by OPEC members was just 3 million bpd at the end of May, according to the International Energy Agency.
Most of the remaining spare capacity is in Saudi Arabia (2 million bpd) with smaller volumes in Iraq (330,000 bpd), United Arab Emirates (330,000 bpd) and Kuwait (220,000 bpd).
Russia also has the capacity to increase output by several hundred thousand barrels per day over the next six months, but spare capacity elsewhere is negligible.
Saudi Arabia, United Arab Emirates, Kuwait and Russia have already pledged to boost their combined output by 1 million bpd from July, which will leave just 2 million bpd of spare capacity left.
If Iran’s exports were pushed close to zero from November, and Saudi Arabia and its allies step up their own production to fill the gap, remaining spare capacity will fall to 1 million bpd or less by the end of 2018.
The volume of spare capacity has not fallen that low since 2004 and before that the first U.S.-Iraq Gulf War in 1991.
But if the level of spare capacity is adjusted for the increase in consumption, it will be at the lowest level since the oil shocks of 1973/74 and 1980/81.
SHOCK ABSORBERS
The oil market relies on a set of shock absorbers to help manage variations in production and consumption and ensure the smooth flow of oil from wellhead to consumer.
In rough order of availability, these shock absorbers are:
* Commercial inventories (including floating storage)
* OPEC spare capacity
* OECD strategic stocks
* Short-cycle oil production (shale and development within existing oil fields)
Most of these shock absorbers have now become seriously depleted as a result of the recent tightening of the oil market.
Commercial inventories have fallen below the average of the last five years and are much tighter if adjusted for the increase in consumption since 2013.
Relative tightness of commercial crude and products stocks is reflected in the backwardation in oil futures contracts.
If Iran’s exports are eliminated entirely, and Saudi Arabia and its allies step up their own production to compensate, the OPEC spare capacity shock absorber will also disappear.
The market will then rely on OECD strategic stocks and increase in short-cycle oil production to meet any further disruptions of supply or unexpectedly fast growth in consumption.
Stock releases from the U.S. Strategic Petroleum Reserve and other IEA members could help ease future shortages and calm prices but only as a temporary measure.
Inventory releases (which are a one-time adjustment in stock levels) cannot offset an ongoing disruption in production (which is a flow problem).
In the medium term, the market would have to rely on an increase in short-cycle production to cover any remaining production-consumption gap.
Short-cycle producers, especially U.S. shale firms, could raise their output but their response will be limited by the lack of available pipeline capacity.
The total supply situation (actual and forecast production, plus inventories and spare capacity) is now largely fixed for 2018/19.
TOUGH CHOICES
The oil market is already at a relatively late stage in the cycle, when prices tend to rise to stimulate faster production growth and moderate consumption growth.
Other things being equal, prices are more likely to rise than fall over the next two years, assuming the global economic expansion remains on track.
If the Trump administration takes a tough line on sanctions and attempts to push Iran’s oil exports close to zero, it will be removing a further 2 million bpd of production from a market that is already likely to be very tight.
The most likely outcome is that prices will rise to cut consumption growth and rebuild the spare capacity and inventory shock absorbers to a more comfortable level.
The almost inevitable consequence is a further increase in gasoline and diesel costs and/or a slowdown in the global economy to curb consumption growth – perhaps as a result of the oil price increase or rising trade tensions.
Markets have fundamental constraints of their own quite distinct from politics. No matter how much it presses Saudi Arabia to boost oil supplies, the White House cannot escape from this logic.
The administration can have tough sanctions on Iran that cut its oil exports close to zero, or it can try to stabilise gasoline prices, but it probably cannot do both.
The most likely outcome is a compromise that sees some Iranian exports continue, while prices increase, but not as much as under a zero exports scenario.
Dan Steffens
Energy Prospectus Group
Energy Prospectus Group