Trump's Iran Deal Pullout Will Push Oil to Over $100

The price of oil continues to rise, heading for its largest weekly increase in a month, as the market prepares for potential disruption to crude flows from major exporter Iran in the face of U.S. sanctions.

The United States plans to impose new sanctions against Iran, which produces about 4 percent of global oil supplies, after abandoning an agreement reached in late 2015 that curbed Tehran’s nuclear activities in exchange for removal of U.S. and European sanctions.

Brent crude futures rose 27 cents to $77.48 a barrel, having gained 3.5 percent so far this week, Reuters reported.

The oil price is at its highest since late 2014 and on track for its fourth consecutive quarterly gain, the longest such stretch for more than 10 years.

Investors and consumers should try to get an idea where the oil price could be, for example, by May 2019.

Trump's exit from the Iran deal means that any new contracts and financial deals with Iran are from now on banned, which means that businesses as well as banks have now 90 or 180 days (depending on the type of transactions that are concerned) to wind down their respective ties with Iran.

The 180 days bring us to November 5, 2018, which is the “key” date because before that date, dealings will continue in something like a “business as usual” way. After that date everybody will have to cut back their oil imports from Iran over the next six months, which is before May 5, 2019.

There are still several details open about the cutbacks before May 5, 2019 that have yet to be unveiled.

As we say, this is not “small potatoes” and there is no doubt, at least not in my mind, that the impact on the price of oil will be important.

Britain, France and Germany have already rejected Trump’s decision and announced they were still committed to the nuclear agreement and have urged Iran to stay in compliance.

Iran is the fifth-largest oil exporter in the world, pumping 2.5 million barrels a day. The U.S.' reimposed oil sanctions could take as much as 1 million to 1.5 million barrels out of  Western markets, which will put substantial upward pressure on the price of oil.

Meanwhile, Trump's move will likely keep geopolitical tensions high in the Middle East.

What is for sure is, at least in my opinion, is that we can expect substantial higher oil prices by the end of this year and in 2019. Of course, investors will have to decide for themselves if they want to play that scenario, but again, in my view, $100-plus oil is back in the cards.

As Jack Welch said: “We will have to face reality as it is, not as it was or as we wished for it to be.”

In the meantime, Saudi Arabian officials have said they will do what they have to do to balance the market, but if Saudi Arabia had to replace all the Iranian oil that will not come to the market, they would be at their theoretical maximum capacity.

We also shouldn’t overlook the fact that the overcapacity possibility of the OPEC oil producers is so far very small. It’s in June that OPEC will have to decide if they want to relax their production cuts or to continue as is.

For now, the oil market is balanced, which means tight, because OPEC is holding back.

So, it’s not an overstatement to say that the oil market could be really tight by the end of this year if OPEC decides in June not to relax their production cuts. In case they would relax their production cuts, then $75 to $85 oil by the end of the year would be feasable.

All the risks for the oil price remain in the short time on the “upside.” One should not forget that also Libya, Nigeria and Venezuela are facing big problems.

So, an important question remains: “Will Europe, China, India and so on buy the Iranian oil?”

The last time we had a similar situation, Europe had its own sanctions. Now, the situation is different, and we can expect that no one, or very few, will fight the American sanctions. Everybody will have to cut back 20 to 30 percent of what they imported and while Europe has somewhat of a “cushion” the Asian share will have to decline, which is of course very important.

Meanwhile, the annual inflation rate in the U.S. edged up to 2.5 percent in April from 2.4 in March, matching market expectations. It is the highest rate since February of 2017. Core inflation remained flat at 2.1 percent.

Etienne "Hans" Parisis is a bank economist who has advised investors on financial markets and international investments.