Whether intentional or not, the US administration has played their hand masterfully. Since the early October highs, oil prices have dropped over 25 percent, paving the way for a 25 cent drop in retail gasoline prices (with a cascade to come).
While a number of supply and demand-side considerations have caused such a stark reversal in both market sentiment and prices, the role of the U.S. Administration cannot be downplayed.
Rising global economic fears, along with a rising US dollar and rising risk-off appetite, have all combined to clobber prices. At the same time, U.S. domestic production has been given a massive upward revision by the EIA: it is now seen as being 2 million barrels per day higher year-on-year.
But the US Administration has played a Harry Houdini-esque role in all of this via misdirection. It convinced the world – and most importantly for the oil market, OPEC – that it was going to bring the hammer down on Iran and slash its exports.
OPEC members, and particularly Saudi Arabia, responded ahead of this perceived shortfall, increasing production to a multi-year high of 10.63mn bpd last month (according to OPEC secondary sources). According to yesterday's monthly IEA report, Saudi and Russia have increased production by a combined 1.06mn bpd since May, with Russian oil production reaching a record high of 11.4mn bpd.
We can see in our ClipperData that Saudi Arabia and other OPEC members have been muscling in on Iran's largest market, China, ahead of a perceived drop. Both Saudi Arabia and Iraq delivered over a million barrels per day each to China last month (while Iranian barrels may have been making their way into bonded storage instead).
The issuance of waivers by the U.S. Administration means they are in a strong position. It puts them firmly in control, allowing Washington to squeeze the Iranian economy while regulating the flow of oil from the country to avoid supply shocks that would raise global crude prices.
They are deterring buyers away from Iranian crude, while theoretically keeping them available. This gives them the ability to keep prices in check, and do the same for Iranian revenues.
This goal is at odds with that of Saudi Arabia, and they are responding. After seeing the success of starving flows to the U.S. last year, it is implementing the same strategy again. After ramping up export loadings bound for the U.S. in July, August and September after the end of the production cut deal, the kingdom has once again throttled back its flows heading west. This means lower deliveries to the U.S. from hereon out to carry us through into 2019.