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To prevent oil spiking to $100 over Iran, Saudi Arabia and Russia might have to step in

  • Oil prices are continuing to hover around 2014 highs, with market watchers waiting to see what happens when U.S. sanctions are re-imposed on Iran.
  • It remains to be seen whether major oil producers like Saudi Arabia and Russia will step into the breach to stop prices soaring after an expected dip in supply.
Iranian oil
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Oil prices are continuing to hover around 2014 highs, with market watchers waiting to see what happens when U.S. sanctions are re-imposed on Iran.

It remains to be seen whether major oil producers like Saudi Arabia and Russia will step into the breach to stop prices soaring after an expected dip in Iranian supply, a top analyst told CNBC on Tuesday.

Prices have risen since President Donald Trump decided last week to pull the U.S. out of the Iranian nuclear deal, meaning that sanctions will be re-imposed on the oil producer that are likely to impact its production and push prices higher.

Helima Croft, RBC Capital Market's global head of commodity strategy, said that a loss of Iranian oil would mean other traditional producers, like Saudi Arabia, having to step into the breach if OPEC was not to risk a million-barrel loss of production, on top of the 1.2 million barrel a day (bpd) supply cut it already makes as part of a deal with non-OPEC producers.

"This is so interesting. We're back to a situation that we did not anticipate of having to appeal to these traditional allies," she said. "Because if you reach infrastructure constraints in terms of ability to put additional barrels on the market and you're going to be taking off Iranian barrels — and don't forget Venezuelan production, which has played a huge role in balancing this market — and they (OPEC) could lose a million barrels year-on-year."

"So, in order to prevent a spike to $100, potentially, you have to go back to Saudi Arabia, you have to ask them to put barrels on the market," she told CNBC's "Capital Connection" on Tuesday.

Brent crude futures are currently trading at $78.71 a barrel while West Texas Intermediate (WTI) is trading at $71.36. Prices have hit highs not seen since November 2014 due to a tighter supply thanks to a production cut strategy between OPEC and non-OPEC producers like Russia to support and stabilize oil prices that fell in 2014 amid a glut in supply.

Prices are also rising on expectations that Iranian output could be sorely affected by Trump's decision to withdraw from the Joint Comprehensive Plan of Action (JCPOA) last week.

The re-imposition of pre-deal sanctions and the threat of secondary sanctions, that penalize countries that do business with Tehran or Iranian organizations, are expected soon. Markets are expecting sanctions to affect Iran's oil production – which stood at 3.8 million bpd in March, according to OPEC figures.

Market share

Ahead of Trump's withdrawal from the deal, Croft told CNBC that up to 350,000 barrels of Iranian oil could be at risk of disruption if sanctions were re-imposed.

Currently, OPEC and non-OPEC producers have restricted themselves to 32.5 million bpd. A loss of a chunk of Iranian oil, as well as from fellow OPEC producer Venezuela as it goes through political and economic turmoil, could see around a million bpd lost, she warned.

Other oil market experts are watching major oil producers closely given the situation with Iran. Mark Schofield, Citi's managing director of global strategy and macro group, and his colleagues Benjamin Navarro and Edward Morse said in a note Monday that one of the key factors to watch regarding Iran and sanctions was "how likely are OPEC and Russia to replace lost Iranian barrels?"

"With prices moving close to $80 a barrel, this is now a good opportunity for Saudi Arabia and Russia to regain market share without crashing the oil price. We think there is a good chance the current OPEC+ (OPEC and non-OPEC countries) deal will end by the end of 2018, if not before," the strategists said.

RBC's Croft said that the OPEC/non-OPEC deal was likely to be secure at least for the rest of 2018, however. She added that there were a lot of questions to be asked at the next OPEC meeting in June.

"(There are) huge questions and that's why I think OPEC is going to be cautious and why Saudi Arabia — which has an additional 190,000 barrels that they're basically under their OPEC quota — and I think that can be used once sanctions start kicking in," she said.

"So there's really no need to adjust the production levels. But I think they'll be watching to see how quickly the sanctions come back and impact Iran's ability to place their barrels."

U.S. shale production has been in the ascendency amid OPEC and non-OPEC production cuts, with higher prices making production viable.

Croft said that shale had been something of a "victim of its own success," however, with infrastructure bottlenecks forming, meaning that the Trump administration would have to turn to traditional producers like Saudi Arabia and the United Arab Emirates to fill any Iranian outages.

"A couple of years ago there was a view that U.S. shale was Superman and that, basically, we wouldn't have to go back to the traditional producers and say, 'Put more barrels on in the event of a shortage.' But, again, now we have these infrastructure constraints and pipelines that are reaching capacity, the Trump administration has to appeal to traditional allies in terms of managing the market."