- Oil exports from Iran had already fallen to their lowest point in two and a half years, down 260,000 barrels of crude and condensate in September, a 39% export drop since April. The decline in production was less than the fall in exports, as Iran’s output only fell 11% during the same period, reaching a two-year low of 3.3 million barrels. The declines are expected to accelerate further once sanctions officially begin on 1 November. Japan and South Korea – two major importers of the country’s crude – have already stopped buying Iranian oil and are starting to diversify their supply; India might follow suit.
- Despite Iran’s deepening losses, OPEC production rose last month as the group’s 15 members pumped 30,000 more barrels in September than in the previous month, an increase mostly driven by Saudi Arabia, Angola and Libya. Russia, a major partner in the 2016 oil deal, has also increased production, at one point jumping as high as 11.36 million barrels a day – a post-Soviet record. The decline in Iranian crude is not just being countered by OPEC members and Russia: in the US, Donald Trump has been giving the impression that he is working with the Saudis to cap oil prices and protect Americans from high gasoline prices. The president has been discussing efforts to ensure that no supply disruption will affect the stability of the oil markets and threaten the growth of the global economy.
- On the demand side, it remains unclear if an end to the Sino–American trade war is in sight. Trump might not de-escalate his attacks on the Chinese before the midterm elections. Reaching an agreement with China will alleviate the fears surrounding global demand from macro investors that recognise that demand growth in the next couple of years will mainly come from China and India. Demand estimates remain stable for now at an average growth rate of 1.5 million barrels per day, but these might be at risk if the effects of the trade war start to affect Chinese demand.
- Looking at oil companies, despite the fact that Q3 results are often hit by planned maintenance and weak seasonal gas demands, we believe that energy supermajors will print strong Q3 results on the back of higher oil price realisations, posting higher-than-expected cash flows. European supermajors in general, and those exposed to WTI and Canadian crude in particular, should continue to benefit from the price differentials in these regions and could outperform their peer group.
Pierre Melki
Equity Analyst Advisory & Research