Jenny Cheng, Business Insider
- Crude oil could top $120 a barrel in the case of a complete cutoff of Iranian exports.
- The Trump administration is cracking down on Iran via oil sanctions.
- Follow oil in real time here.
Crude oil could surge to more than $120 a barrel, according to Bank of America Merill Lynch analysts, if the Trump administration were to order a complete cutoff of Iranian barrels before the end of the year.
"Oil is now a game of chicken," the analysts wrote in a note Thursday. They said zero-tolerance sanctions on Iran - the fourth-largest oil producer - could add $50 per barrel to crude prices, which are up more than 25% this year. Brent, the international benchmark, is currently trading at around $77 a barrel.
The State Department said this week that certain countries, including India and South Korea, will be allowed reduced flows of Iranian oil. And Saudi Arabia recently agreed to increase production by two million barrels per day, according to a White House statement.
But analysts are skeptical Saudi Arabia will be able to keep up. The unofficial leader of the Organization of Petroleum Exporting countries has never pumped more than 10.6 million barrels per day on average over a single month, according to BAML.
"It appears the oil market has little confidence that Iran volumes can be easily replaced," the analysts wrote.
The move is part of Trump's withdrawal from the Iran nuclear deal, which previously eased economic penalties on the country as long as it curbed its nuclear weapons program.
The oil sanctions come after OPEC and other supply-cutting countries agreed at a summit in June to reduce compliance from more than 150% in May to about 100% starting this month. The cartel had previously been practicing over-compliance in efforts to tackle a global oil glut.
But it is unclear if the new agreement will be able to balance supply as multiple producers - Venezuela, Libya, Angola, Mexico, or Nigeria - face major output disruptions.
"Unlike in trade wars, oil price shocks do not have winners," the analysts wrote. "But these do not include the US, China, Europe, Japan."
BAML
The analysts estimate that every million barrel per day shift in supply and demand balances would push oil prices by $17 a barrel on average. Based on that assumption, they added, zero Iran exports could push oil up by $50 a barrel if Saudi Arabia caps out.
"In this game of chicken, we expect someone will blink before that happens," they wrote.
Get the latest Oil WTI price here.