Interview with Cheddar: Trump’s Iran Sanctions, Oil Prices and China

Interview with Cheddar: Trump’s Iran Sanctions, Oil Prices and China

Yesterday, I had the pleasure of speaking with Cheddar TV’s Hope King and Tim Stenovec on Trump re-imposing sanctions on Iran and what it means for oil prices, consumers, U.S. oil, China tariffs and relations, and the global market.

Hope King: You’ve said that this is what could be the beginning to be an ugly period for oil prices. Explain the reasoning here.

Matt Badiali: It just comes at a terrible time in the oil market. Global growth has increased the demand for oil and at the same time we have one of our significant producers, Venezuela, which is on its way to becoming a failed state; and so these guys are shedding oil production every month, so the oil market is tightening. At the same time we have about 2.2 million barrels a day coming out of Iran and if that goes offline, which the White House’s stated opinion is they want no oil exports out of Iran, which is pretty much going to get squeezed higher.

Tim Stenovec: About 3 million barrels day (we’ll just round this up a little bit) – Matt let’s just contextualize this for the people who are not super familiar with the oil market. What portion of that would the U.S. consume or buy, per day?

Matt Badiali: Let’s talk about where Iran’s oil is going to go, because if it comes off the market, you’re going to have buyers from South Korea, Japan, probably India looking for that extra oil. The suppliers will probably be Russia, some from the U.S., and Saudi Arabia, obviously. The interesting (kind of ) dynamic here is that China was taking about 600,000 barrels a day of Iran’s oil. The latest data just came out and showed that China has come up to over 800,000 barrels a day, which is about 36% of Iran’s total exports and it’s a pretty significant jump for them. It’s about a 75% increase over the last 6 months in Iran’s oil. So, China to me is the wildcard in all of this, depending on how much of that oil they take from Iran will kind of help figure out where the oil price goes. Regardless of how much of this oil stays in the market and how much comes out, what you have to understand going forward is nothing else can go wrong or else oil prices are really going to spike. So, we need the Middle East to stay calm, we can’t have any more interruptions in supply, we can’t have Nigeria go rogue, we can’t have Libya have problems. If anything happens in the oil market going forward, oil prices are really going to be volatile and probably spike much higher to the upside.

Hope King: That’s a lot of ‘if’s’ there Matt and we can only control for so many factors, the ones that you listed are almost completely out of the U.S.’ control. I do want to hone in on the China aspect of this as well because we are locked in this trade war, escalation, whatever you want to call it, with China. The country just threatening, again, another round of retaliatory tariffs. Does China know its role in this particular case here with the oil prices? Is that something that they may use in the bargaining going forward with the rest of the tariffs?

Matt Badiali: Absolutely. China has the ability to mess with the U.S. role in Iraq. And it seems to be the direction they’re taking, simply by increasing their imports from Iran, they could have a pretty significant disruption in the sanctions process. They also have the ability to stop taking U.S. exports, because they do take a significant amount of U.S. crude exports. We don’t export a lot of crude oil relative to the rest of the market, but China does take some of that. So, by stopping taking U.S. imports and taking more of Iranian imports, it’s basically a stick in the eye to the White House.

Tim Stenovec: Matt, help us paint a picture for consumers about where this hits them. Obviously in the form of higher gas prices, in the form of higher airline ticket prices, but where else will consumers be paying for higher oil prices?

Matt Badiali: Oil is the most fundamental tax on Americans. It’s instant inflation. Oil prices go up and it costs more to take the kids to school, it costs more to go to the grocery store, it costs more to buy the things you want at the grocery store. Or, your Amazon Prime has to cost a little bit more because it costs more to deliver it to your door.

Hope King & Tim Stenovec: Amazon has actually in the past said, “we are raising Prime prices because of higher oil prices.” Well, let’s not forget the role that oil plays in the production of our plastics and other parts of our supply chain. It’s not just in these big crude barrels that we have to refine for our use in these types of energy for us, but again, in these components and the ingredients of our everyday lives as well. So, that affect will take a little bit longer for us to see because of all the supply chain issues. Matt, before we let you go, who are the winners here? Obviously, the consumers are losers when prices go up, but who are the winners here?

Matt Badiali: Right now, I am looking at a couple places. I think pipelines in the U.S. Obviously more demand means every inch of pipelines in the U.S. are going to be full, so we’re looking at collecting dividends from these big pipelines; they’re basically the toll roads of the oil supply. Also looking at U.S. refiners, because what we see right now in the U.S. is a big discount. West Texas shale oil, so the stuff coming out of the Permian Basin – trades between 10 and 15 dollars below WTI prices because there’s a giant traffic jam getting it from West Texas to the refiners. So, the refiners get to buy cheap crude oil and then they can sell the refined product on the international market and compete with everyone else.

View more coverage on Trump’s sanctions on Iran and what I expect to see take place in the oil market as a result, in my interview with Politico.

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