The U.S. sanctions that hobbled Iran's oil exports may have been a concern for American motorists facing higher prices at the pump. But as a new round of sanctions begins, gasoline and oil markets are showing something else.
NYMEX crude oil futures prices, which are based on the U.S. West Texas Intermediate (WTI) benchmark, have tumbled nearly 18 percent from a four-year high near $77 a barrel in early October. In the first trading days of November, NYMEX crude for December delivery settled near a seven-month low.
'Ripples Beyond Iran'
Shipments from Iran, one of the world's top oil producers, remain sharply down after the United States, in May, withdrew from a multi-country agreement aimed at curbing Iran's nuclear program and re-imposed sanctions on Tehran. A second round of U.S. sanctions takes effect this week.
Oil exports from Iran, averaged over 2.5 million barrels a day as recently as April. That number has since plunged about 35 percent, according to Bloomberg.
Iran's oil exports "could drop by up to two-thirds this year with the reinstatement of sanctions," the Council on Foreign Relations said in an August statement. "That could have ripples beyond Iran as global oil markets cope with supply strains.
Still, the world has hardly been cut off entirely from Iranian oil. The United States recently agreed to allow India and South Korea to continue buying some Iranian crude. Iran's shipments to its two biggest customers, China and India, have surged in recent weeks, according to S&P Global Platts.
Relief at the Gasoline Pump?
Pump prices followed the crude market lower through October. Motorists can expect even lower prices in coming weeks, says Andy Lipow, a veteran energy industry consultant and president of Lipow Oil Associates, LLC, in the Houston area.
As crude prices declined, "those savings are being passed down to the pump. I expect pump gasoline prices will continue to decline 10 to 15 cents a gallon in coming weeks," Lipow says.
On the NYMEX, recent futures prices suggest traders expect gasoline prices to climb through the first half of next year. RBOB gasoline futures for July 2019 delivery, for example, settled a $1.9476 on Nov. 2, compared to $1.7083 for the December 2018 contract.
Crude typically leads the rest of the petroleum market. If oil prices rise or fall suddenly in one week, the full impact will filter through to the pump two to four weeks later. In September, crude accounted for about 51 percent of the U.S. retail price of gasoline, according to the Energy Information Administration (EIA) (refining costs, distribution and marketing and taxes accounted for the rest).
U.S. Shale Production Keeps on Booming
The recent shift in attitudes from the market in part reflects the accelerating U.S. oil boom. In August, the U.S. pumped an average of 11.35 million barrels of crude a day, up 19 percent from the same month in 2017 and an all-time high, according to the EIA.
U.S. crude output will average 10.7 million barrels a day in 2018, up 14 percent from 9.35 million barrels a day in 2017, and will rise to 11.5 million barrels a day in 2019, according to an EIA forecast. Crude exports from the U.S. are also soaring.
"The United States continues to show stellar performance" in oil production, the International Energy Agency said in a September report.
"With U.S. oil production at a record high, combined with increases in Russia, Nigeria and Libya, oil market sentiment has turned bearish, in spite of the sanctions on Iran," Lipow says. "The market anticipates that the increases in world oil production are significant enough to offset lower Iran supplies."
Winter is Coming. OPEC, Too
The global economy continues to expand, potential supply disruptions in the Middle East remain a concern, and the winter heating season for Europe and North America is underway.
Additionally, top crude-producing nations step in to keep prices from falling much further, analysts said. The next meeting of the Organization of the Petroleum Exporting Countries (OPEC) is scheduled for Dec. 6, and analysts believe potential output cuts will be on the agenda.
"OPEC probably will act to stabilize prices and, in conjunction with Venezuela and Mexico, we could see slight recovery in oil prices into 2019," Lipow says.
To Buy or Not to Buy
Still, geopolitics are always difficult to predict with much accuracy, and energy markets may remain on edge for the foreseeable future, analysts caution.
"We are entering a very crucial period for the oil market,'' the International Energy Agency said in its September report, noting the U.S. sanctions raise questions over Iran's role in the global market and who may or may not buy crude from the country. Some reports say China will continue its purchases, which could weaken the effectiveness of sanctions.
"It remains to be seen if other producers decide to increase their production," the agency said. "Things are tightening up."
Written by Bruce Blythe. Read more from the author here.
(This article is sponsored and produced by CME Group, which is solely responsible for its content.)
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