Oil markets firm amid OPEC cuts, Iran sanctions

Opec and its allies face some important decision making in the coming weeks. Luis Enrique Ascui  Reuters

"Saudi Arabia appears to be focusing more on pushing up crude higher rather than restoring the balance in oil's supply and demand, and that is underpinning prices". If demand growth continues to be strong-as now expected-an already tight oil market could become even tighter amid geopolitical concerns, driving oil prices further up.

Since the accord was reached at the end of 2016, oil prices have climbed to their highest in almost four years to exceed $77 a barrel, up from $30 in early 2016.

A high-profile Iranian official has pointed out that the potential US sanctions that US President Donald Trump touched upon last week have not so far affected the flow of oil supplies to worldwide markets, despite earlier predictions. "However, analysts say the stage was already set for this week's 4-percent gain for the S&P 500 energy sector".

The world is now watching the growing tensions in the Middle East, and oil market analysts are guesstimating just how much Iranian oil supply the renewed US sanctions could stifle.

Markets have generally tightened as the Organisation of the Petroleum Exporting Countries (Opec), led by Saudi Arabia, has been withholding supplies since 2017 in order to push up oil prices.

Unfortunately for motorists, that glut has been drained by a combination of strong global demand and production cuts from Venezuela and a collection of OPEC and non-OPEC oil producers.

Oil held near $71 a barrel on heightened political risks in the Middle East following unrest in Gaza and the return of sanctions against Iran. March inventories were only 9m barrels above 5 year averages.

Non-OPEC oil producers such as Azerbaijan, Bahrain, Brunei, Equatorial Guinea, Kazakhstan, Malaysia, Mexico, Oman, Russia, Sudan, and South Sudan agreed to reduce output by 558,000 barrels per day starting from January 1, 2017.

"We expect that after the OPEC+ agreement expires by the end of 2018, it could take up to five years for its oil production to return to 2016 levels, which will in turn constrain overall GDP growth relative to historical trends", its report read.

"Is OPEC, possibly together with its non-OPEC peers, going to fill the void potentially left in global supply by Iran?". This domestic production increase will have a significant moderating influence on future oil prices.

"Although oil could venture higher in the near term, robust production from U.S. shale remains a threat to higher oil prices", he said.

While a huge accretion to Excess Crude Account is expected, public finance analysts also said the current situation will impact positively on the implementation of Nigeria's 2018 budget which was benchmarked on $45 per barrel and the production of 2.3 million barrels per day.

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