Saudi Arabia was targeting crude oil priced at $88/bbl by the end of 2018 to fetch good rates for its Aramco deal. As good friends do, the USA seems to have paved the way for the Kingdom to realize that level much sooner than anyone thought three days ago. The pullout of the US from the Iran nuclear deal and fresh imposition of sanctions of the highest order, have sent the oil price to a 4-year high.
Brent was seen trading at $77/bbl yesterday, up 3 percent in a single day. Some say the “Trump Premium” on crude oil was underrated. And so it seems, as it promises to sway the oil market more than the geopolitical tensions, disruptions, and alliances that go on round the clock. Much will depend on how much of the share Iran stands to lose – and the estimates wary a great deal.
The extreme case may put off more than 1.2 million barrels per day from the oil market – and that could be big enough to keep prices inflated. Some say, the lukewarm reaction from major European nations may take some steam off of the sanctions and the actual pull out may not be more than 0.3 million barrels per day. Either way, that is six months way from happening, and expects the uncertainty premium to keep oil prices north.
Much will depend on how Iran’s biggest buyers – China, India, Korea and Japan, react to the US sanctions. Even if China pays no heed to the sanctions, a pullout from two of India, Japan and Korea could be significant enough to keep the supplies short. Mind you, Opec along with Russia, has already made public its intentions of extending the production freeze deal.
Some would say, the Iranian void could be an opportunity for Opec and Russia to bridge the gap, without increasing the overall global supply. But anyone tracking Saudi Arabia’s mood would not buy this argument – as the Kingdom is all prepared to wait longer for the “right” time for Aramco deal. Oil at $88/bbl could well be around the corner – and don’t be surprised if the Saudis are now looking for triple figures by the year end.
What all of this could mean to Pakistan is scary. Pakistan has benefited in the last three-four years, from lowest oil prices. The trade deficit already reads a worrisome tale, and If oil decided to settle anywhere higher than where it is, it could be really tricky. Watch this space for more on impact of higher crude oil price on Pakistan’s economy.