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Editorial comment

In the third week of May, US President Donald Trump announced that he was withdrawing the USA from a 2015 international agreement to curb Iran’s nuclear programme, and was reinstating sanctions against Iran. By pulling out of the Joint Comprehensive Plan of Action, which was negotiated and implemented under Barack Obama’s presidency, Trump dips out of the agreement by which Iran submits itself to international inspections in return for a waiver on nuclear sanctions.

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The reinstatement of US sanctions against Iran looks likely to push oil prices further up, as uncertainty lingers over global oil supply. The IEA recently warned of a “double supply shortfall” and subsequent price hike, as oil from Iran and Venezuela (where oil production has bottomed out following an economic crisis) is withdrawn from the market.

In addition to these losses, OPEC has been curtailing production for more than a year as Saudi Arabia’s state-run oil company, Saudi Aramco, prepares to sell its shares on the open market as part of an upcoming IPO.

In the wake of the Iran news, oil prices were holding at over US$71/bbl (WTI) and US$77/bbl (Brent). Prices have risen by nearly 75% since June 2017.

Replacing the crude exported from Iran (2.5 million bpd) will be a long-term endeavour and OPEC is confident that the world won’t experience any impact on supply for at least 180 days after the sanctions are due to take effect (November 2018).

November will see midterm elections in the US. Midterms are often regarded as a referendum on the President’s, and his party’s, performance and they typically see the incumbent’s party lose seats in Congress (only two past Presidents have avoided this and gained seats for their party in both the House and the Senate in midterm elections: answer at the foot of the page).

US voters (or at least the ones that drive) are being pinched at the pump lately as the price of oil creeps up. In May, US gasoline prices were at their highest level since Hurricane Harvey caused a brief spike in August 2017. Will retail prices spill over the US$3/gal. price point that so many US consumers hold sacred? Will this negatively impact President Trump’s midterm results?

The IEA expects that higher oil production from the US will need to compensate for lower volumes from elsewhere in the world. US oil production has indeed been increasing, combined with a recent decline in oil and gas inventories.

Thanks to the shale industry, which since 2010 has been a shot in the arm to America’s domestic production, the US has overtaken Saudi Arabia as an oil producer and domestic gas production levels break records every year.

The Permian shale basin has dominated a recent rebounding of the shale oil sector (following a slump in 2015 - 2016 due to oversupply). But the Permian sector is experiencing problems in getting oil to market. Pipelines are full, there are no easy routes to refineries or terminals and trucks and trains are pretty full too, mostly with sand shipments for application in hydraulic fracturing. Three new pipelines that will help the situation won’t be online until 2019: Cactus II (Plains All American), Gray Oak (Phillips 66 and Enbridge) and EPIC are all due in service next year and will help ease the bottleneck. Nevertheless, some analysts predict that Permian supply will exceed pipeline capacity by 750 000 bpd by September 2019.1 US refineries are also mostly set up to process heavier crude, so the light oil produced in abundance in the shale regions may have to be traded at a discount overseas, where the market for light crude isn’t especially promising.

President Trump’s move to isolate Iran by cutting off its access to international oil markets will likely contribute to a rise in global oil prices and encourage more domestic oil drilling, which will boost oil – and with it, gas – output from the shale plays. Surely the existing US gas supply glut and oil transportation bottlenecks will be felt even more keenly as a result.

President Donald Trump has, in recent months, accused OPEC of ‘artificially’ boosting prices, but this time he would have to admit his own hand in creating a problem.

Answer: Franklin D. Roosevelt (1934) and George W. Bush (2002).

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