President Donald Trump announced Tuesday he was pulling the United States from the Iran nuclear deal and reinstating sanctions, curbing supply from the Middle East at a time oil prices at their highest level in three years.
Oil prices had been climbing steadily for weeks in anticipation of the announcement, with analysts warning of a more severe price spike should Trump carry through. Oil, which fell Tuesday after settling above $70 a barrel Monday, quickly reversed its losses after Trump’s announcement.
With crude production near 4 million barrels a day – the equivalent of Texas – Iran is the world’s sixth largest oil producer, according to the U.S. Department of Energy.
But only a fraction of that supply is expected to come offline. Trump has so far failed to win over his counterparts in Asia, some of whom, including China and India, have signaled they plan to continue to import Iranian crude despite U.S. sanctions.
“This time, we don’t think it will be anywhere near as successful as it was in 2012,” Edward Morse, global head of commodities research at Citi, told CNBC, referring to sanctions imposed against Iran by the Obama administration.
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With crude prices rising and producers within the Organization of Petroleum Exporting Countries pledging to limit supply, shale drillers in Texas and elsewhere in the United States are expected to jump in to fill the void left by Iran.
“Any additional supply will fall on the shoulders of U.S. producers. Something I’m sure they are happy to hear,” Dan Eberhart, CEO of Denver-based oil field services firm Canary LLC, said in an email.
Analysts are projecting between 300,000 and 500,000 barrels of crude will be removed from the market in the months ahead, enough to raise prices but not enough to cause a sustained spike.
“The market’s initial reaction is likely to overshoot (although current sentiment has probably priced in at least a portion of the sanctions risk already),” wrote Frank Verrastro and Kevin Book, of the Center for Strategic and International Studies in report last week. “The magnitude and duration of the increase, however, will more likely be determined by the details.”
But the new sanctions will bring some instability to an oil market that has been remarkably short on geopolitical crisis in recent years.
Still, few in the oil industry are popping champagne, in anticipation of a return to 2014 when crude was selling for more than $100 a barrel.
Asked about the Iran sanctions at an event in Washington Tuesday, BP Head of Technology David Eyton said it wouldn’t affect the company’s long term plans.
“The price of oil or natural gas going up or down, that happens,” he said. “You can not afford to change your view of the longer term based on things going up or down in the short term.”