The Trump administration has finally faced up to what many knew all along: It won’t be able to take Iran’s oil exports down to zero.
The U.S. is set to grant waivers to eight countries, allowing them to continue to import some level of oil from Iran, on the condition that they ratchet down their purchases in the months ahead. The full list of the countries will be released on Monday, but they will surely include China, India, South Korea and Japan, which are four of Iran’s top buyers.
“The reported awarding of waivers by the US for up to eight countries to continue buying Iranian oil, on the basis that they reduce volumes, shows that in the short term at least the Trump administration has set aside the goal of trying to cut Iran's oil exports to zero,” Peter Kiernan, lead analyst of energy at the Economist Intelligence, said in a statement.
Convincing countries to zero out imports from Iran was always going to be tricky. On the one hand, even if the Trump administration had a free hand, it would be technically difficult to achieve. Iran continues to discount its crude, offer cargoes in barter deals, use currencies other than the U.S. dollar, and otherwise ship oil using a variety of furtive means. Iran was always going to be able to maintain some level of exports.
More importantly, however, the oil market is simply too tight to zero out Iranian supply. Notwithstanding the latest plunge in oil prices – down more than 15 percent in the past month – the market is still tight. The U.S. and OPEC are adding supplies at a torrid pace, but it is unclear if this can keep up. The U.S. could see production growth slow in 2019, and in the case of OPEC, the additional production comes at the expense of spare capacity.
The room to maneuver for the White House is still pretty thin. “Although there are concerns of weakening oil demand in 2019 the underlying fear is that an abrupt shut off of Iranian supply would cause a spike in prices and leave oil consuming economies scrambling to buy oil elsewhere,” Peter Kiernan, lead analyst of energy at the Economist Intelligence, said in a statement. “Saudi Arabia may be able to partially offset substantial Iranian supply losses, but not completely, leaving the market extremely vulnerable to a supply interruption from another source. Therefore, to some extent the Trump administration has had to show to some flexibility as larger oil buyers such as India and China especially have been unwilling to immediately cease all purchases from Iran.” Related: World’s Cheapest Natural Gas Market Could Be Facing A Shortage
Wood Mackenzie expects Iran to lose another 800,000 bpd of exports compared to September levels after sanctions take effect, taking total exports down to 1 million barrels per day. “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,” Ann-Louise Hittle, VP Oil Markets at Wood Mackenzie said in a commentary. “Brent should hold around US$78 a barrel, but it’s a very fine line. OPEC spare capacity was an ample 4-5 million b/d two years ago. There’s only 0.7 million 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.”
If the Trump administration had succeeded in zeroing out Iran’s oil exports, prices would have gone much higher. But that would have presented a political problem at home, ahead of mid-term elections. That was a price the administration was not willing to pay. Instead, as it became clear in recent weeks that Iran’s oil exports were going to hold up, oil prices fell back.
Still, despite the concession, the Trump administration struck a confident tone and tried to convey its determination to continue to disrupt Iran’s oil exports. “We’re quite confident moving forward that the actions that are being taken are going to help us exert maximum pressure against the Iranian regime,” deputy State Department spokesman Robert Palladino said at a briefing on Thursday.
To the extent that the Trump administration succeeds in this effort, it will only be able to do so as long as oil prices remain at tolerable levels. Otherwise, more waivers for longer periods of time will be required.
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By Nick Cunningham for Oilprice.com
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