Prepare for $90 oil after sanctions against Iran take effect

Prepare for $90 oil after sanctions against Iran take effect

Iran's oil exports dropped by 7 percent to 2.32 million bpd in July-their lowest level in four months-as South Korea and Europe are slashing imports ahead of the return of the USA sanctions on Tehran, data from S&P Global Platts showed on Tuesday. These sanctions did not include Iran's oil exports.

The reimposed sanctions target Iran's USA dollar purchases, metals trading, coal, industrial software and its auto sector.

An even bigger surprise can come from Washington later today regarding the Iranian sanctions. With U.S. sanctions snapping back on Tuesday, however, U.S. President Donald Trump said any company working with Iran would be isolated.

Spot Brent crude oil futures were at $73.88 per barrel at 0241 GMT on Tuesday, up 13 cents, or 0.2 percent, from their last close.

"Saudi Arabia knows that the USA really does want to see maximum impact from sanctions towards Iran, which means that they want to prepare all buyers of Iranian crude to say 'there is plenty of oil in the market and don't be afraid to pull back on Iran (purchases)", said Bjarne Schieldrop, head of commodities strategy at SEB.

Analysts expect Iran's oil exports to drop more noticeably beginning in September, and the rate of decline to accelerate as the United States looks to have Iran's current customers reduce Iranian oil imports to "zero". However, Russia, the United States and the Saudi's are still producing 10 million to 11 million bpd of crude.

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"The market continues to price in geopolitical risk from the reimposition of sanctions by the USA on Iran", said Gene McGillian, vice president of market research at Tradition Energy in Stamford, Connecticut.

Meanwhile, other major producers are ramping up their output.

USA crude stockpiles were expected to have dropped 3.3 million barrels last week. Overnight, the price of oil will move on data on U.S. crude oil and gasoline inventories from the American Petroleum Institute and on Wednesday on data from the U.S. Energy Information Administration. Some analysts warned that a global heat wave could also now affect oil demand.

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.

This is not about bombarding the market with oil and pushing the price into the $50s, it is about preparing the market and easing the transition, he said.