Oil prices are flat this morning just two days after Brent crude skyrocketed on Monday in response to an attack on the Saudi oil industry.
Convinced that Iran was responsible, President Trump ordered the Treasury Department to “substantially increase” sanctions on the oil-producing nation – something he announced via tweet in today’s early A.M. hours.
Drone and missile debris recovered at the Saudi Aramco site is proof enough to the Saudi defense ministry that Iran orchestrated the strike. The drone wreckage – which matched parts used in the Iranian Delta-wing unmanned aerial vehicles (UAVs) – were particularly damning, as were the “pincer” maneuvers (UAVs approached simultaneously from the north and south) used to carry out the attacks.
Satisfied with the Saudi investigation, Trump gave Mnuchin the “green light” to heap even more sanctions upon Iran.
However, analysts and economists alike are unsure of what those sanctions will actually entail. The U.S. has effectively thrown the book at Iran over the last year and could be running out of non-military punishments.
The only remaining options include a food embargo – which seems both cruel and unlikely – or an all-out Iranian oil ban.
After all, oil is still Iran’s lifeblood. And if anything, the Saudi oil attacks have proven just how large the world’s oil reserves truly are. More importantly, they shed light on how easily the market can absorb a shock disruption.
Because for the first time in human history, we’re able to simply “flip a switch” and flood the market with oil to keep prices stable.
It’s come as somewhat of a shock to oil speculators, as the industry has hit a near-historic low in total active drilling rigs in 2019.
That’s because production capacity has only gone up as drilling operations have slowly declined – all thanks to significant technological advancements that allow companies to produce more barrels than ever before.
In fact, just the Permian basin (located in west Texas/southeastern New Mexico) is expected to produce 8 million barrels of oil per day by 2023. That’s more than what the entire U.S. was able to produce just six years ago.
So, even if Trump targets oil with his next retaliation against Iran, prices appear likely to stay low. Producers are in complete control of the market these days as they rapidly approach excess capacity – the point at which demand for oil falls short of max-production.
And if oil’s staying low, you can be sure that key equity sectors will be impacted in different ways. Oil-producing companies, for example, will continue to fight with slimmed margins. Pending a massive cost-saving breakthrough, their expenses are likely to remain the same.
Meanwhile, the airlines will flourish, confident that the world can unleash its oil reserves on the market whenever the price per barrel starts creeping upwards.
Even in the event that Middle Eastern oil production is restricted further – particularly in Iran, where Trump could be ready to make his mark.