US tensions with Iran could trigger an oil price rally this year

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US sanctions on Iran may lead to an oil price rally in 2017, according to economists at RBC Capital Markets.

The escalation in provocative Iranian military maneuvers could be the catalyst for US President Donald Trump to refuse to give Iran a positive quarterly certification – a requirement for the continued waiver of US congressional energy sanctions, they said.

Sanctions against the third-largest producer among the OPEC, Organization of the Petroleum Exporting Countries, will penalise foreign energy companies operating in Iran as well as countries that import crude from the nation. That could potentially take out a large part of the Iranian oil from the market and reduced supply could lead to a price rally.

This week Iran is reported to have conducted its first ballistic missile test since Trump took office. While such tests are not a direct violation of the nuclear deal, they are seemingly in contravention of the UN Security Council resolution. That resolution, while negotiated alongside the nuclear agreement, is separate and calls on Iran to not carry out any activity related to ballistic missiles “designed to be capable of delivering nuclear weapons.”

Here’s RBC’s OPEC risk scale

RBC’s note comes as three key OPEC countries, Iraq, Iran and Libya, are included in the Trump administration’s new immigration policies with different implications for oil. The three together produce almost 9 million barrels of crude a day.

In Iraq, the operations of US oil companies and energy firms could be affected if Iraq’s parliamentary measure calling for reciprocal restrictions on US nationals entering the country becomes law. There is a far less oil risk in Libya, but there could be a broader shift in US policy towards the country. While Saudi Arabia was not included, there are other issues of concern, namely a possible tax on US energy imports, RBC said.

Any sanctions on Iran would have an impact in the second half of the year, RBC said. If Iran were to cut its production in response to waning demand due to the sanctions, other OPEC members may seek to make up the difference through a partial reversal of cuts proposed in November, thus maintaining output, it said.

The chart below shows the demand from the largest importers of Iranian oil

While large importers of Iranian crude such as India and Turkey largely went along with US sanctions previously, it is far from certain that they would toe the line should the sanctions be reapplied, RBC said. India recently displaced China as the biggest importer of Iranian crude and South Korea has also stepped up Iranian oil imports.

Crude traded at US$53.8 a barrel and is headed for a third weekly gain on estimates that OPEC has reached about 60 percent of its output-cut target.

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