EIA lifts Brent forecast on Iran sanctions worries

The US Energy Information Administration (EIA) is raising its Brent crude price forecast by $5/bl to $81/bl for the fourth quarter, citing uncertainty over the effects of US sanctions on Iran.

US will re-impose restrictions on Iran's oil exports on 5 November, but many buyers already have begun to wind down their purchases of Iranian crude.

Opec members in the third quarter increased output by an amount greater than declining exports from Iran and Venezuela, the EIA said today in its Short-Term Energy Outlook. But "recent price increases indicate that oil market participants have concerns about the ability of Saudi Arabia, other OPEC members, and Russia to continue to offset expected further production declines in Iran and Venezuela," the agency said.

The EIA data are among the factors the administration must consider as it decides on the scope of waivers from Iran sanctions in coming weeks.

Administration officials insist that Iran's forced exit from the market, partial or full, will not have a significant effect on global crude markets as Saudi Arabia and other Opec and non-Opec producers, as well as growth in US output, make up the gap. A rise in oil prices could hurt President Donald Trump's administration politically if Americans see a noticeable jump in what they pay for gasoline ahead of crucial midterm elections in November. Trump has taken to blaming Opec producers for the recent increase.

"The administration is learning the hard way that it is difficult to drive Iran's oil off the market and keep gasoline below $3/USG," consultancy Rapidan Energy Group president Bob McNally said. "We are kind of touching the stove and learning that Saudi Arabia really cannot or will not keep oil prices from rising."

The EIA estimated Opec spare capacity at 1.3mn b/d in September — its lowest level since December 2016 when global oil inventory levels were much higher.

But the agency also forecasts that global oil supply and demand will be nearly balanced in 2019, contributing to downward pressure on the oil price.

The administration's economic brain trust has sought to downplay the risks to pump prices.

White House chief economic adviser Larry Kudlow last week said — without any details — that internal government analysis shows US crude output growing to 15mn b/d in 2020. The EIA today estimated 2019 output at 11.76mn b/d. The agency's most optimistic scenario for oil production in 2020, published in February as part of its Annual Energy Outlook 2018, pegs it at 12.8mn b/d.

White House Council of Economic Advisers chairman Kevin Hassett said yesterday that global demand growth is the primary driver of higher oil prices, even though Iran sanctions have played a role as well. "When the global economy is strong, oil prices tend to increase, and those increases can be quite non-linear," Hassett said.

The IMF in its latest economic outlook released yesterday lowered global growth projections to 3.7pc/yr in 2018-19, citing negative effects from the US administration's trade wars with key partners.

"If the IMF revisions of the world growth forecasts are correct, that will put less pressure on the oil prices," Hassett said.

Trading firm executives speaking at the Oil and Money conference in London today agreed on the severity of the effect of US sanctions against Iran.

The administration sees such comments as validation of their approach, despite concerns about effects on US gasoline consumers.

"Iran is fighting for their lives. They have got riots in all their cities. It is blowing up. Their inflation, their economy is in tatters. And at some point, they will probably come and want to make a real deal, not the deal that they made," Trump said yesterday.

The IMF expects Iran's economy to contract by 1.5pc in 2018 and another 3.6pc in 2019 as US sanctions affect oil exports from that country.

The EIA, in a separate bimonthly report to Congress on the effects of sanctions on Iran, estimated global production of oil and products — excluding Iran — at 93.4mn b/d in August-September and consumption at 96.5mn b/d. The estimated 3.1mn b/d gap compares with a 4mn b/d shortfall estimated in the EIA's previous report based on June-July data. The estimate is a hypothetical snapshot of the market balance assuming Iran is completely shut out from the global supply-and-demand balance.