The Double-Edged Sword Of High Oil Prices
Rising oil prices were seen last year as a positive result of growing global growth and recovery, but a combination of factors is turning this benign view into a more sinister scenario.
On the supply side, the combined efforts of OPEC and Russia, leaky as the agreement has been, have managed to reduce the global oil surplus in just 18 months to bring the market largely into balance. As a result, oil prices have gradually risen during the period. It’s a trend most observers have been sanguine about, believing the U.S.’s tight oil producers, encouraged by rising prices, will increase output to ensure ample supply and keep a lid on oil prices getting ahead of themselves.
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But that benign view had not taken account of President Trump’s decision to rip up the Iran nuclear deal and, as a result, to reinstate sanctions, a move that will take place in two phases to give firms time to adjust.
According to The Telegraph, this will be done in two stages, on Aug. 6 and Nov. 4, allowing 90- and 180-day wind-down periods. In addition, the Treasury is to re-list Iranian individuals and entities in the Specially Designated Nationals (SDN) list, thus revoking special licenses and exceptions previously granted to individuals and companies to deal with Iran, making it all but impossible for firms with a U.S. presence or needing dollar clearing to deal with them.
Lastly, Iran’s crude oil sales will be limited under the National Defense Authorization Act of 2012, as the U.S. departments of State, Energy and Treasury will allow ongoing but reduced purchases of oil from Iran, termed “significant reduction exceptions” on a country-by-country basis if they demonstrate a commitment to substantially decrease oil purchases (usually at least a 20 percent reduction).
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