Oil markets watching as Trump pledges to 'substantially increase' Iran sanctions

Scott Saloway

President Trump is pledging to hit Iran with new sanctions in the wake of the drone attack on Saudi Aramco facilities last weekend. He tweeted that he’s ordered Treasury Secretary Steven Mnuchin to “substantially” increase sanctions, though it’s not clear just what’s in store.

The oil markets have been whipsawing ever since word of the attacks emerged, and any sort of U.S. military action against Iran could send oil significantly higher, says RJO Futures Senior Market Strategist John Caruso.

“We went from about a 2 on the geopolitical risk scale to an 11 over the weekend,” Caruso told Yahoo Finance’s “The First Trade.” “This is going to be a very newsy driven market over the next several weeks.”

This is a well-supplied oil market, Caruso said, but added, “I think the factor to keep an eye on is the geopolitical risk moving forward that cannot be discounted, that has been taken out of the market the last several years.”

Houthi rebels in Yemen have claimed responsibility for the attacks, but the Saudis have been outlining evidence they say shows “material evidence” of Iranian involvement. Iran denies it.

Caruso expects an escalation in a fight with Iran could push West Texas Crude (CL=F) above $80 a barrel; it’s now at $58.80 As it is, after spiking 15% on Monday, West Texas Crude has been sliding after the Saudis said they expect to have the facilities back online by October, and that damage may not have been as bad as first thought.

TOPSHOT - Smoke billows from an Aramco oil facility in Abqaiq about 60km (37 miles) southwest of Dhahran in Saudi Arabia's eastern province on September 14, 2019. - Drone attacks sparked fires at two Saudi Aramco oil facilities early today, the interior ministry said, in the latest assault on the state-owned energy giant as it prepares for a much-anticipated stock listing. Yemen's Iran-aligned Huthi rebels claimed the drone attacks, according to the group's Al-Masirah television. (Photo by - / AFP)        (Photo credit should read -/AFP/Getty Images)
Smoke billows from an Aramco oil facility in Abqaiq about 37 miles southwest of Dhahran in Saudi Arabia's eastern province on September 14, 2019. (AFP/Getty Images)

“We are in the process to bring back oil refining to full capacity,” Saudi Energy Minister Prince Abdulaziz bin Salman told reporters Tuesday. “The company will honor all of its commitments to its customers this month by drawing from its reserves of crude oil and further modified some of its oil until the production capacity of the country is up to 11 million barrels a day by the end of September and up to 12 million barrels in November.”

“The restoration of the supply from the Aramco facility coming back online by month-end has certainly taken the bid out of the market,” Caruso said.

He said oil could slide to $57 a barrel, but expects it will go much higher in the coming months.

“I think ultimately this market slingshots higher into the back end of the year, where we look at $65 to possibly $70 crude,” Caruso said.

Read more:

Oil’s link to the broader stock market largely depends on the dollar: expert

Expert: Saudi Arabia's vulnerability 'the biggest surprise' of drone attack

Goldman: Here are the stocks set to gain from surging oil prices

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