How Iran Influences the Crude Oil Market

A change in the supply and demand relationship in the oil market is the most influential factor on which commodity traders should focus. The principle is very straightforward: when supply is greater than demand, prices tend to fall, as they did in mid-2014. On the other hand, when demand exceeds available output, prices tend to go up, as they do during times of geopolitical crisis, especially in the troubled Middle East.

Iran is the world’s third-largest Oil producer, and traders closely monitor news related to the country as they attempt to predict how its production levels could influence the global market. In February, Iranian production reached 3.83 million barrels per day (bpd) according to data from the US EIA (Energy Information Administration). Currently, crude output from Iran is almost at a 9-year high, after the country accelerated production when the US lifted trade sanctions in January 2016. Between December 2015 and February 2018, Iran increased Oil production by about 37%, or 1,035,000 bpd. The country is aiming for production of 4.7 million bpd by 2021, which could put additional pressure on the international Oil market.

Last year, the prices of WTI and the Brent crude averaged USD 50.79 and USD 54.15 per barrel respectively. Oil prices have recently been supported by OPEC decisions to cap its members’ production to achieve more stable market conditions and a stronger long-term outlook. OPEC’s largest and most powerful producer, Saudi Arabia, needs Brent crude prices at about USD 70 this year in order to finance its economic projects and to support the initial public offering of Saudi Aramco, the state-owned Oil company. For Iran, a price of around USD 60 would be enough to meet its domestic commitments. Prices are now trading around the USD 70 level, and Iran is worried that the recent rally (a rise of about 45% since June 2017) will support US drilling activities, and by extension, production and exports, which have doubled since last year. This could flood the market, putting added pressure on prices and severely affecting all other Oil-exporting economies.

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