Iran’s Oil Exports Implode As Sanctions Sting

Iran's oil exports are plunging.

Waivers on U.S. sanctions for Iranian oil purchases expired earlier this month, and there is evidence that most countries are steering clear of running afoul of Washington. The result is an absolute plunge oil exports from Iran.

Bloomberg reported on May 9 that "not a single ship has been seen leaving Iran's oil terminals for foreign ports," according to tanker tracking data. There has been speculation that refiners in China and India might continue importing oil from Iran. India, bought 400,000 bpd from Iran in April, according to Bloomberg, stockpiling ahead of the expiration of waivers.

But so far, tanker data suggests that most parties are complying with Washington's demands, and Iran is suffering from a tightening noose. However, Bloomberg notes that tanker data is not full-proof. Ships leaving Iran can switch off their transponders so that they "disappear" from view. For instance, there have been no tracking signals from 10 very large crude carriers for at least 16 days. Bloomberg suggests that most likely they are being used for floating storage.

Meanwhile, separate data suggests that Iran is shipping oil to Syria. In the first week of May, at least one tanker delivered crude to a Syrian port, according to CNBC, TankerTrackers.com and ClipperData.

While the precise volume exported from Iran may be higher than zero, shipments are undoubtedly crashing. Iran's oil exports could fall from 1.2 million barrels per day (mb/d) to 0.7 mb/d by this summer, according to Ann-Louise Hittle, VP Oils Research at Wood Mackenzie. Related: Exxon Presents Its Very Own Solution To Climate Change

A separate report from the King Abdullah Petroleum Studies and Research Center (KAPSARC) has a different take, and concludes that "the international community, and indeed some of the waiver countries, will at best partially comply with renewed U.S. sanctions." Not only that, but the report argues that the U.S. may have to back down a bit in the face of rising oil prices. "Our modeling also suggests that there remains a high risk of U.S. capitulation in the face of international pressure to extend or reissue waivers, or to replace them with some equivalent mechanism." Much depends on whether or not Saudi Arabia rides to the rescue and adds supply in order to offset outages in Iran.

For now, though, the collapse of Iran's oil exports is underway, which will significantly increase the economic pressure on the country. That may not lead to the downfall of the Iranian government, as the Trump administration hopes. If anything, it is pushing their back against the wall, likely contributing to a tit-for-tat cycle of escalation.

The U.S. seems intent on provoking Iran into making a misstep. In April, not only did the Trump administration announce that it would not extend waivers on oil purchases, it also labeled the Iranian Revolutionary Guard Corps as a foreign terrorist organization. More recently, U.S. national security adviser John Bolton said that American warships heading towards the Middle East were supposed to be a message to Tehran. Finally, the Trump administration announced new sanctions on Wednesday targeting Iran's metals exports, another crucial source of hard currency.

Iran had seemed content with waiting out the Trump administration, but with oil exports plunging and the benefits of the 2015 nuclear accord now vanishingly small, some within the Iranian government are more eager to pushback. Iran said that it would stop complying with certain parts of the nuclear deal. Related: The Biggest Catalyst In Oil Markets Is Going Unnoticed

Top American officials are beating the war drums. Secretary of State Mike Pompeo said that Iran was "escalating their activity," without providing evidence or detail. Acting Defense Secretary also said that there was "very, very credible intelligence" about an imminent threat from Iran, again without much detail. Some see echoes of the lead up to war with Iraq in 2003 in which intelligence was exaggerated. Iran's foreign minister, Mohammad Javad Zarif, said that while war may not be imminent, the U.S. is "putting things in place for accidents to happen."

Although, as the Washington Post reports, it's not clear that Trump and his national security adviser are on the same page. "Trump has said in recent days that Bolton wants to get him 'into a war' - a comment that he has made in jest in the past but that now betrays his more serious concerns, one senior administration official said," the Post reported. Trump issued a statement Wednesday saying that he looks forward to "someday meeting with the leaders of Iran in order to work out an agreement." While Bolton is out for war, it's not clear that Trump has the same desire.

Whether or not a military confrontation is in the offing, the pressure on Iranian oil exports from the U.S. will certainly not let up.

"We expect Brent to hold a little over US$70/bbl in the coming months. But the US policy decision to throttle supply with simultaneous sanctions on Iran and Venezuela is fraught with risk," Ann-Louise Hittle of WoodMac said. "Yes, OPEC can meet the immediate shortfall, but that leaves precious little spare capacity if there's more supply disruption. Mounting geopolitical tension is a real threat to oil market stability."

By Nick Cunningham of Oilprice.com

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