U.S. to Terminate Sanctions Waivers on Iranian Exports

The Trump administration said April 22 the U.S. would end all waivers from Iran energy export sanctions when they expired May 2. S&P Global Platts reports the announcement sparked an immediate threat from Iran to close the Strait of Hormuz, the world’s busiest oil transit choke point. In turn, crude oil futures settled at new six-month highs April 22 as the market eyed an increasingly tight global supply picture in light of the White House decision.

The business information provider notes that Iran’s top customers, among them China, India, and Turkey, will be risking U.S. sanctions enforcement if they continue to import Iranian oil after their waivers expire. The Trump administration has asserted it intends to “bring Iran’s oil exports to zero, denying the regime its principal source of revenue.”

Iranian oil exports averaged more than 1.7 MMbbld in March, including nearly 628,000 bbld sent to China and more than 357,000 bbld shipped to India, according to S&P Global Platts trade flow data and shipping sources. Iranian exports had fallen below 1.06 MMbbld last November when the U.S. re-imposed sanctions. That level was down from just below 2 MMbbld in November 2017. Analysts had widely expected the U.S. to extend waivers for some of Iran’s biggest buyers of crude and condensate, including China, India, South Korea and, potentially, Turkey.

“The decision will not only mean maximum pressure on Iran, but also maximum pressure on oil markets, especially as we head into the high-demand summer season,” said one analyst. S&P Global Platts sees “much tighter” oil supply for the remainder of the year,” adding that the sanctions move “nearly exhausts the oil market’s spare capacity in a time when risks to oil supply are high.”

Further, China’s response to tougher U.S. oil sanctions on Iran will be crucial to the 2019 oil supply and price outlook. The top importer accounted for 40% of Iran’s shipments in the first quarter of this year, and China has the ability to skirt sanctions without damaging its economy, analysts said. India, Iran’s second-largest customer, accounted for 23% of first-quarter shipments. India is expected to largely comply with U.S. sanctions, analysts said. Japan and South Korea, which each accounted for 13% of Iran’s first-quarter exports, will almost certainly halt trading with Iran when their waivers expire.

“China is the big $80/bbl question, and one that oil markets will be closely following,” remarked an analyst. “I think China will further reduce imports from Iran in a nod to U.S. policy, but will continue buying Iranian crude in defiance of U.S. sanctions.” Trade talks between the U.S. and China complicate the question of Beijing’s compliance with Iran sanctions. Analysts said the U.S. may find a way to ease up on sanctions enforcement in exchange for concessions as part of any eventual trade deal. Still, U.S. secretary of state Mike Pompeo told reporters April 22 the U.S. would strictly enforce the sanctions and monitor compliance. “Any nation or entity interact- ing with Iran should do its diligence and err on the side of caution,” he said. “The risks are simply not going to be worth the benefits.”

Pompeo said U.S. officials “have used the highest possible care in our decision to ensure market stability,” including discussions with importing countries to help find alternate supplies. He said rising U.S. oil production has also helped with the transition, citing Energy Information Administration (EIA) data on U.S. output growth of 1.6 MMbbld from 2017 to 2018 and expected growth of 1.5 MMbbld this year. He said he was confident Saudi Arabia and the United Arab Emirates would make up any supply gaps. “They have committed to making sure that there’s sufficient supply in the markets, and I’m confident that we’ll achieve that. I’m confident that they’ll support this policy that is consistent with their objectives as well.”

President Donald Trump tweeted April 22 that Saudi Arabia and other OPEC members will “more than make up the oil-flow difference in our now full sanctions on Iranian oil.” However, analysts said global output cooperation would be more challenging. “The U.S. wants to leave the impression that its Gulf partners will replace Iranian oil barrel for barrel,” said Ellen Wald, an energy industry and policy consultant at Transversal Consulting. “But the Saudis can’t publicly commit to anything more than a general market management.”

S&P Global Platts reports while Saudi Arabia has the ability to replace Iranian barrels, doing so would strain its spare capacity and ability to replace other supply at risk, including threatened supply from Venezuela and Libya. Saudi Arabia, OPEC’s largest producer, curtailed its output by 280,000 bbld in March to 9.87 MMbbld, its lowest since February 2017. “For the next month and a half, Saudi Arabia can increase production above 10.3 MMbbld if it wants, because its production over the last few months was lower,” Wald said. “However, heading into the June 25 OPEC meeting, Saudi Arabia will need to convince its OPEC and non-OPEC partners that it is not beholden to a deal with the United States. Otherwise, Saudi Arabia will lose leverage in Vienna.” At the same time, the April 22 sanctions announcement came as the U.S. is still considering secondary sanctions on Venezuelan oil exports, although analysts said those would likely be delayed.

Meanwhile, Iran’s response has been aggressive. The nation repeated its threat to shut down the Strait of Hormuz, drawing a U.S. military pledge to respond. The strait, at the mouth of the Persian Gulf, is viewed as the most important oil chokepoint in the world, with Saudi Arabia, Iraq, Iran, Kuwait, and the United Arab Emirates all dependent on it to transport crude and refined products to world markets. S&P Global Platts, citing EIA, reports that in the first half of 2018, about 18 MMbbld of crude and condensate, roughly 4 MMbbld of petroleum products, and about 300 million cu meters per day of LNG were shipped through the waterway.

(SOURCE: The

, May 6, 2019)