How analysts will react to Trump’s Iran decision
President Donald Trump’s decision to pull the US out of the Iran nuclear deal is likely to have major economic consequences, even potentially scuttling the boost from the GOP tax law for Americans’ wages.
By leaving the Iran deal, Trump would limit access to oil from the country and make a large piece of the global supply unavailable in the US. In turn, this would likely help drive gas prices higher. And as analysts have noted, gas prices don’t need to climb much to eat up a large portion of the discretionary spending savings from the GOP tax law.
Damien Courvalin and Jeffrey Currie, analysts at Goldman Sachs, say between 250,000 and 500,000 barrels per day could be subject to US sanctions and pulled off the market. That would boost oil prices anywhere from $3.50 to $7 per barrel above their current trajectory, the analysts said.
Energy industry insiders say Trump’s tough stance on Iran will probably keep oil and gasoline prices higher than they would otherwise be.
Iran ramped up its oil production by 1 million barrels per day after sanctions were lifted in early 2016. At least some of that oil will now be pulled from the market — at a time when oil prices are already rising because of production cuts by OPEC and Russia as well as instability in Venezuela.
Trump telegraphed the move, and oil prices shot up in recent weeks as traders anticipated it. Crude topped $70 a barrel this week for the first time in nearly four years. Hours before Trump’s announcement, federal government forecasters raised their estimate for 2018 oil prices by 10.5% to an average of $65.58 a barrel.
Crude oil prices swung wildly on Tuesday, eventually climbing back above $70 a barrel later in the day.
No one knows exactly how high prices will go. That will be determined by a range of factors, including how much Iranian crude is restricted by the sanctions and whether other major producers — such as the United States — fill the gap.
Just how much of Iran’s growth in oil production is at risk — and when it could decline — is uncertain. The Treasury Department said on Tuesday that sanctions targeting Iran’s oil trade and energy industry will come with a six-month lag.
Most analysts believe that at least some nations will ignore the new American sanctions and continue buying Iranian crude. China, Iran’s largest customer, may be especially reluctant to cut Iran off because of the trade tensions between Beijing and Washington.
Other major producers could fill the hole left by Iran. Saudi Arabia, for instance, has the ability to crank up output. Yet analysts say Saudi Arabia would like to keep prices rising ahead of the IPO of its state-owned oil giant Saudi Aramco.
Production in the United States is surging thanks to the shale revolution. In fact, the Energy Information Administration lifted its 2019 domestic output forecast on Tuesday by nearly 4% to a record 11.9 million barrels per day.