Global oil markets reacted with a price surge following the re-introduction of the first tranche of US sanctions on Iran that came into force on Tuesday.
Amid widespread concern that the revived US sanctions against Iran, which shipped out almost three million barrels per day of crude in July, would tighten global supply, Brent crude oil futures rose 86 cents to $74.61 per barrel at 1052GMT and US West Texas Intermediate (WTI) crude futures were up 59 cents at $69.60 a barrel.
The reimposed sanctions initially target Iran's US dollar purchases, metals trading, coal, industrial software and its auto sector. A second tranche coming into effect on November 5 will cover Iran's oil sector.
Economists at Capital Economics said the sanctions would result in a downturn in Iran's economy but, as things stand, the economic impact on the rest of the Mena region shouldn't be severe. "That said, the sanctions may heighten geopolitical tensions in the Middle East, which are likely to weigh on local financial markets," they said.
"While there's still some uncertainty about what will happen to Iranian oil, we think there probably won't be a significant impact on oil prices. The US decision to pull out of the Joint Comprehensive Plan of Action has been known since May, so the market has had time to price in reduced Iranian output - probably of about one million barrel per day (bpd) - into oil prices," analysts at Capital Economics said.
Ehsan Khoman, head of Mena Research and Strategy at MUFG Bank, said the world's largest oil producers - Saudi Arabia, the US and Russia - continue to attempt to manage oil prices in-check primarily for geopolitical reasons, aiming to increase supply near-term to help lower (or at least prevent further rises in) oil prices, and their bilateral relationships among them are driving near-term oil markets.
"This "Big 3" coordinated oil market management in response to a move out of the $70-80/b Brent range does provide some gravitational pull for prices to move back into this range, as was demonstrated last month by the Saudi announcement that it was prepared to adjust exports to meet rapidly changing market condition."
"However, the central geopolitical risk stems from the Iranian threat of closure of the Strait of Hormuz - a critical conduit for global oil supplies with 17 per cent of global crude oil and products travelling through this narrow channel on a daily basis," said Khoman.
"We envisage that Iran views its threat to close the Strait of Hormuz, per se, as in fact more advantageous than its actual execution as closing the Strait has a regressive impact on Iran's interests as more than 80 per cent of Iran's oil exports pass through these narrow waters, and thus Iran will be cutting off its own economic lifeline," said Khoman.
"It is a reality check that this is happening and that Iran's oil exports will be hurt when the oil sanctions hit it in November," chief commodities analyst at Commerzbank Bjarne Schieldrop said.
"A full embargo seems unlikely and the oil market should remain well balanced in light of rising production and the emerging markets' fuel inflation pains," Norbert Rucker, head of macro and commodity research at bank Julius Baer, said.
Analysts at Capital Economics said Gulf economies are likely to raise oil output further over the rest of the year under the revised Opec deal, in part, to offset the impact of lower Iranian output.
"This will provide a direct boost to GDP growth via higher oil production, which we have already incorporated into our forecasts. Unless Iranian oil output falls dramatically, we won't change our view that the Gulf economies will experience a modest recovery over the coming quarters," they said.
Analysts also warned that a global heatwave could affect oil demand. Much of the northern hemisphere has been gripped by extreme heat this summer, pushing up demand for industrial and residential cooling.
This mostly impacts demand for power fuels such as thermal coal and natural gas.
"With global demand remaining healthy and the global heatwave increasing oil demand, I think prices will remain well-supported in the near term," Hussein Sayed, Chief Market Strategist at FXTM, said.
Source : https://www.msn.com/en-ae/news/other/will-oil-prices-hit-peak-again/ar-BBLCFMa