World market impact of US sanctions on Iran

On 5 November 2018 President Trump’s administration reimposed all US sanctions on Iran that had been lifted under the 2015 nuclear deal. The sanctions cover Iran’s oil industry, ports, shipping, aviation, banks and insurers, effectively shutting the Middle East country out of the global trading system.

According to the US Treasury, the goal of the sanctions ‘is to reduce Iranian exports to zero as soon as possible’. Mike Pompeo, US Secretary of State, has stated that any companies violating the sanctions will face ‘swift and severe’ penalties.

Commenting on recent oil market uncertainty ahead of the sanctions deadline, Callum Macpherson, Investec’s Head of Commodities, said: ‘It had seemed that yesterday [5 November] should have provided some much needed clarity on the details of the Iran sanctions waivers the US has granted to certain countries. However, while Secretary of State Michael Pompeo confirmed that the countries receiving waivers are China, India, Italy, Greece, Japan, South Korea, Taiwan and Turkey, no other details were released (although there are stories of the limit for China being only 360,000 b/d – around half its October imports). This means we are no closer to being able to assess the true impact of the waivers. Are the details being withheld until after the mid-term elections to avoid any danger of the oil market rising and bringing US gasoline prices with it?’

He continued: ‘Technically, the price of Brent is quite constrained. For the last few days it has been moving around between $72/b and the 200-day average near $74/b. However, there is also a resistance line from the down-channel it has been following since early October. Before long, Brent must either break $72/b, which would open up a move towards $70/b, or break the trend-line resistance, indicating the start of a larger move higher. In lieu of details on the sanctions waivers, the inventory numbers tomorrow might trigger a move. It is also possible the results of the US mid-term elections might have an impact. Whatever one thinks about Trump, the implementation of his tax policies have been accompanied by strong rallies in equity markets. Losing control of the house could make further tax cuts challenging and this may have a bearing on equity markets and sentiment more broadly. On the other hand, there could be a renewed challenge to his trade policy which might be seen as benefitting global growth – and hence a benefit for oil prices.’

Meanwhile, market analyst Wood Mackenzie expects the oil market to face ‘a precarious few months’, noting that there is enough supply to meet demand this winter, but the margin for error is narrow.

Homayoun Falakshahi, a Senior Research Analyst with Wood Mackenzie’s Middle East Upstream team, said: ‘After the implementation of the nuclear deal in January 2016, Iranian production and exports recovered to pre-sanctions levels inside six months. Exports reached a peak of 2.8mn b/d in April 2018, including 300,000 b/d of condensate. Buyers have come from numerous countries, with the bulk sold into Asia, the Mediterranean and Northwest Europe.’

He added: ‘Since the US withdrew from the nuclear deal in May 2018, Iranian crude and condensate exports fell to around 1.8mn b/d in September on our estimates… Crude sales will be concentrated around a core of supportive state buyers, China, India and Turkey,’ and potentially a few others.

Falakshahi continued: ‘It will be difficult for Iran to maximise exports when virtually all trade in oil is cleared in US dollars, putting international oil companies, many national oil companies, traders and banks off limits. Crude exports contribute one-third of government revenues, so there’s a huge incentive for Iran to use every conceivable lever.’

‘We’ve seen Iranian crudes discounted by $1/b compared with similar Middle East grades, the biggest for a decade. Iran is hoping the EU’s barter proposal – goods as indirect payment for oil – opens doors, though we doubt any big oil traders will leap at the opportunity.’

‘Access to shipping insurance is also a problem, although Iran has its own fleet of 60 tankers and has offered cargoes CIF (cost, insurance and freight) to buyers. Specialised tanker trackers suggest Iranian tankers are operating ghost with disabled ID systems to avoid detection.’

‘Condensate is very important to the story. Iran’s production is around 750,000 b/d, big in global terms, with about half exported. The condensate is produced in association with gas needed for the domestic market so can’t be shut-in like oil. During the 2012–2015 sanctions, Iran increased condensate sales to cushion the impact of lost oil exports. It’s not clear they’ll have the same flexibility under the new sanctions. South Korea, the biggest buyer, and UAE, have now stopped condensate imports.’

Ann-Louise Hittle, Vice President Macro Oils at Wood Mackenzie, added: ‘There are implications for the oil market. The biggest risk is this winter. Losing another 1mn b/d or more from Iran comes on top of a similar loss in supply from Venezuela over the last couple of years. Saudi Arabia, UAE and Kuwait have stepped up production since July to minimise the increase in price as the market tightens.’

‘We think there’s just enough growth in supply from elsewhere to muddle through the next few months, meet winter demand and avert a price spike. Brent should hold around $78/b, but it’s a very fine line. Opec spare capacity was an ample 4mn to 5mn b/d two years ago. There’s only 700,000 b/d of additional available within 30 days right now. That means the market is vulnerable to strong demand in a cold winter or any new supply outage.’

‘The situation may look better once the northern winter is over, but only up to a point. We forecast that Brent will ease, averaging $74/b in 2019. We expect supply to grow 1.6mn b/d in 2019, with US tight oil driving this. That’s well ahead of 1.2mn b/d of demand growth and should lead to a healthy inventory build during the year. But with Iran in the full grip of sanctions and Venezuela continuing to decline, that limited Opec spare capacity will cast a shadow over the market for some time.’