Oil prices spiked higher over the past week.
From Thursday to Monday [August 27-31], the benchmark West Texas Intermediate (WTI) crude oil price rallied 28%. A lot of the move happened after news that OPEC (the Organization of the Petroleum Exporting Countries) might finally be willing to work with other producers to help oil prices recover.
This has some investors fired up about the sector again. But don’t be fooled. The fundamentals don’t support higher near-term oil prices. And the reason, in one word, is Iran…[ad#Google Adsense 336×280-IA]As regular readers know, the price of WTI crude oil fell 65% from June 2014 to August 2015.
The decline came from a glut of oil supply.
And for the first time in nearly 30 years, OPEC – the oil cartel that has effectively set the oil price for decades – didn’t step in to prop up oil prices by cutting production.
Instead, it decided to let production fall naturally.
Saudi Arabia – the leader of OPEC – even increased its production.
In May 2015 (the latest data available) Saudi Arabia produced 10.14 million barrels per day. That’s 450,000 barrels per day more than it produced a year ago.
Now, the world has roughly 2 million barrels of extra oil per day, according to the U.S. Energy Information Administration. And it’s likely about to get even more from Iran…
Due to sanctions, Iran has basically been shut out of all Western crude oil markets since 2012. This has had a huge impact on Iran’s oil exports and its production. For example, Iranian crude oil production fell by 27% from 2011 to 2012.
But the West will likely soon lift these sanctions.
You’ve probably heard about the recent nuclear deal with Iran. In short, in exchange for Iran curbing its nuclear program, the U.S., the U.K., France, China, Russia, and Germany have agreed to ease sanctions on Iran. This includes removing sanctions on Iran’s oil exports. The deal hasn’t been approved by Congress yet. But earlier this week, President Obama secured enough support to make sure he can overcome any opposition.
Once the deal goes through, Iran plans to ramp up oil exports and production immediately. Iranian Oil Minister Bijan Zanganeh told CNN that his country can (and will) produce another 1.5 million barrels of oil per day by the end of 2016. And OPEC isn’t going to help. Despite the cartel saying it might be willing to help, it hasn’t made a move to actually cut production. In fact, it appears ready to produce a record 33 million barrels per day as Iran comes back on line.
More oil flooding into the market will choke oil prices further. Short of an economic miracle in the next 18 months, I don’t see any significant relief for oil prices in the near term.
Don’t fall for the short-term rallies. Oil prices will be low for a while.
Source: Growth Stock Wire