Oil prices fell Tuesday as President Trump announced that the U.S. would exit the Iran nuc.ear deal and reimpose sanctions.
West Texas Intermediate Crude fell 1.6 percent on the New York Mercantile Exchange. Brent Crude, the international standard, fell 0.71 percent. In the futures market, light sweet crude for June delivery declined 1.43 percent.
Earlier in the day, most oil prices had been even lower. Prices pared those losses after Trump’s announced a U.S. policy that was more immediate and left less wiggle room than many analysts expected.
In recent months, oil prices have moved up following a decision by OPEC and Russia to limit production to raise prices. Oil prices trade in a range selected by Saudi Arabia, which sets prices for crude oil much the way the Federal Reserve sets the price of overnight borrowing by banks. The Saudis pick their desired price level and let the volume float to clear at that price. This can break down when a global economic slump saps demand for oil but otherwise it puts Saudi Arabia in the position of setting oil prices.
This is likely the reason that oil prices did not move higher despite the fact that U.S. sanctions would require international companies to buy less Iranian oil or risk stiff penalties on business they do in the U.S. Saudi Arabia was one of the first countries to announce its support for the Trump administration’s policy, a move many market watchers believe signals that the Saudis will not allow prices to spike when Iranian supply is removed.
Iran exports about 2.6 million barrels a day, a small but not insignificant amount of the total world supply. Much of it goes to Asia, particularly China. U.S. sanctions could reduce the supply by up to 500,000 barrels, according to industry estimates. Goldman Sachs said this would potentially add $7 a barrel to oil prices. But that’s unlikely given the ability of Saudi Arabia to make-up for any lost supply.
Prior to the Iran nuclear deal, the Obama administration pressed global oil companies to cut purchases of Iranian oil. Although Iran’s oil sales fell by more than 1 million barrels a day, crude oil prices remained very low thanks to U.S. shale oil production and Saudi Arabia’s pledge to keep prices low.