Constraints in oil supply from Iran and Venezuela due to production declines, along with growing demand, should keep a floor underneath Brent crude prices above US$80 per barrel through the end of the year, according to an Oct. 12 report from Fitch Ratings.
The analysts said that forthcoming U.S. sanctions against Iran caused the country's oil output to drop by 350,000 barrels per day in September.
In early May, U.S. President Donald Trump announced the U.S. would withdraw from the 2015 Iran nuclear pact, and economic sanctions suspended under the deal would resume. Sanctions impacting the oil sector will begin in November.
"We believe at least 1 million barrels per day may be at risk unless sanction waivers and exemptions remove pressure to cut production further. Venezuelan output in September was 700,000 bpd below its OPEC quota as the economic and political crisis continues to cripple the country's oil industry," Fitch said.
The analysts said production declines in Iran and Venezuela could reach 2 MMbbl/d, or more, which is their estimate of maximum global spare capacity, mostly in OPEC countries and Russia. "Prices might come down if OPEC producers manage to make up for the lost volumes," Fitch wrote.
Worries that the Iran sanctions would tighten supply prompted OPEC and its 10 allies to agree June 23 to reduce over-compliance with their cut and increase output by 1 MMbbl/d in the coming months.
In the meantime, global oil demand is expected to remain strong in the short term but is harder to predict further out. This coupled with U.S. shale supply growth could lead to more balanced supply state in 2019 and weigh on oil prices.
"However, the very limited spare capacity left in the market is likely to continue to influence prices. We cannot rule out an alternative scenario where oil prices keep rising or stabilize in the US$80-US$90/bbl range should OPEC and Russia be unable to sustainably offset the production fall," the report said.