President Trump’s announcement that the United States would withdraw from the Joint Comprehensive Plan of Action, commonly known as the Iran Deal, is great news for those that have a vested interest in the oil industry. Crude prices rose to over $70 per barrel, following Trump’s announcement, a price that the market hasn’t seen since 2014.
One major reason for the surge in prices are the sanctions that will soon take effect on Iran’s oil exports. Six months from now, those sanctions are expected to go into effect, and they will have a serious impact on the global oil market. Energy industry insiders say that Iranian sanctions will keep at least a million barrels of oil per day out of the global marketplace. That perceived scarcity of oil in the coming months has traders expecting oil prices to remain high, and possibly rise even higher as the year progresses.
No one actually knows what the Iranian sanctions will look like, but Trump has promised that the will be significant. "We will be instituting the highest level of economic sanction," Trump said. "Any nation that helps Iran in its quest for nuclear weapons could also be strongly sanctioned by the United States."
As noted in a previous article, there are other factors at play in the global oil market, namely destabilization in Venezuela, along with an OPEC/Russia agreement that was designed to limit production from those countries to raise global oil prices. The agreement between OPEC and Russia has been extended through the end of the year, and Saudi Arabia, a major member of OPEC, is pushing for further extension in an effort to raise the price per barrel even higher.
While the upswing in the price of oil means that consumers will be paying more at the pump for fuel, it is good news for American oil producers who suffered when the prices dropped several years ago. BakerHughes’ US Oil Rig Count paints a clear picture of the challenges producers have faced in the past several years dropping from 1,609 rigs in 2014 to just 316 in 2016.
To put that in an economic perspective, with a rough average of 50 employees per rig, that means that at the minimum over 60,000 people lost their jobs during oil slump, but in reality, that number is much, much higher. That’s because with decreased operations there is also a decreased need for support staff, and for related industries. Local economies and state economies also lost tax money that they could have collected, meaning that in oil-producing areas, the slump in the market left gaping holes in the financial health of their communities.
As of April 2018, the Baker Hughes’ US Rig Count is back up over 800 and looks to be steadily rising. That might have a significant impact on gasoline prices at the pump. As American producers ramp up production to take advantage of higher prices per barrel, they risk flooding the market, driving down the demand, and then driving the price per barrel back down. It’s a delicate balance, but only time will tell. For now, oil futures are trading higher, which means that analysts and industry experts expect the prices to continue to rise.