Markets will be 'surprised' by how many buyers reject Iranian oil once US sanctions kick in

An Iranian oil tanker and a South Korean (R) tanker docking at the platform of the oil facility in the Khark Island, on the shore of the Gulf. (Atta Kenare / Getty Images)
  • Oil has fallen by around 5% this week, but CBA still expects prices will climb above $US90 a barrel.
  • Commodity analyst Vivek Dhar said looming US sanctions against Iran could have a bigger impact than markets expect.

Amid the chaos on global share markets, oil prices have fallen by around 5% this week.

Overnight, OPEC Secretary General Mohammad Barkindo said monthly production rose to the highest level this year in September. He also alluded to a possible supply surplus in 2019 as global demand tails off.

Benchmark crude oil is back at around $US80 a barrel, down from its recent four-year high above $US86.

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However, CBA commodities analyst Vivek Dhar doesn’t think it will stay there for long.

“We think brent crude oil prices will lift to $US90 a barrel by mid-2019, as Iran’s oil exports fall and US supply growth disappoints,” Dhar said.

Markets are still assessing the possible fallout from President Trump’s sanctions against Iran, which are scheduled to go into effect on November 4.

“The Trump administration is hoping that no country will purchase Iranian oil,” Dhar said.

“And while that seems unlikely, we think the market will be surprised by how many buyers will abstain from purchasing Iranian crude oil.”

CBA expects sanctions against Iran will reduce global oil supply by around 2%.

And while OPEC’s mid-year agreement to boost production has increased supply by around 1%, that’s largely been offset by output declines in Venezuala and Angola.

So in aggregate, Dhar said the sanctions in Iran will create a supply shortfall in the coming months.

He also provided an update on CBA’s outlook for another key component in the global supply picture — US shale oil.

Previously, Dhar has noted that while the US has plenty of shale oil to pump, infrastructure constraints will limit how much of it reaches the market.

However, he noted that both OPEC and the US Energy Information Administration (EIA) have recently made more bullish forecasts on US production.

“That suggests that US pipeline constraints may not be as restrictive as we believe,” Dhar said. But it won’t be enough to put downward pressure on prices amid the other threats to global supply.

The main risk to CBA’s $US90 a barrel forecast is demand. Dhar highlighted this week’s report from the International Monetary Fund, which downgraded its global growth forecast for 2019.

The IMF cited weakness in emerging markets, protectionist trade policies and tighter financial market conditions as the main reasons for downgrade.

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