The Trump administration is going to extreme lengths to disrupt as much oil from Iran as possible, and the implications for the oil market could be severe.
When the Obama administration sought to isolate Iran, it built an international coalition, put in place tight sanctions, and tried to curtail Iran’s oil exports. It worked, knocking around 1 million barrels per day offline. Still, the Obama administration granted leeway to an array of countries that depended on Iranian oil, including India, Japan and much of the EU, by granting them exemptions from sanctions as long as they did their best to reduce purchases.
The Trump administration has no compunction about making harsh demands to various countries, including U.S. allies, to cut off Iranian oil.
The U.S. government is calling on its allies to zero out imports of oil from Iran by November 4, or else face sanctions, and Washington is leaning towards granting no waivers at all. An official from the U.S. State Department said on Tuesday that it had plans to follow up on the matter with Turkey, India and China, even as the U.S. is trying not to “adversely impact” these countries, Bloomberg reports.
Late last week, Bloomberg also reported that the U.S. has sent a request to Japan to completely halt imported oil from Iran. Japan imported a little less than 180,000 bpd from Iran in 2017.
The fallout from a hard line from Washington could be significant. In the lead up to the U.S. withdrawal from the Iran nuclear deal, many analysts predicted that the Trump administration would struggle to match the impact of international sanctions on Iran from 2012 through 2015, particularly because the U.S. would have to do it without the help of the European Union, Russia or China. As such, the thinking was that the Trump administration might only be able to disrupt a few hundred thousand barrels per day of Iranian supply. Related: Iran Blames OPEC For Vague Output Agreement
However, the impact is starting to look more substantial, and even Iran acknowledges the threat. “I don’t believe they can receive waiver from the United States,” Iranian oil minister Bijan Zanganeh said in a Bloomberg television interview. “We are going to find some other way."
“The market was more relaxed about the impact of renewed U.S. sanctions on Iran when it was first announced, but now there’s a growing realization that we could be losing close to 1 million barrels a day of exports,” Nevyn Nah, an analyst at Energy Aspects Ltd., told Bloomberg.
Oil prices spiked on the news, rising by more than 3 percent on Tuesday afternoon. WTI is back above $70 per barrel for the first time in over a month.
The effect of knocking 1 mb/d of supply offline by the end of the year is hard to overstate. The oil market is already in a deficit situation, with inventories continuing to decline. Venezuela is expected to continue to post production declines, likely losing several hundred thousand barrels per day of supply by the end of the year, at the very least. Surprise outages from Libya, Nigeria and, most recently, Canada came out of nowhere over the last few weeks. Together, all of the disruptions more than overwhelm the 600,000 bpd that OPEC+ is set to add back onto the market. Related: Power Grab In Libya Threatens Oil Industry
As such, the oil market was already trending in a bullish direction, but the possible outage of 1 mb/d of supply from Iran would be pretty painful. Recognizing the dangers here, including the potential political fallout, the Trump administration is asking for more oil from major producers.
On Monday, U.S. Secretary of Energy Rick Perry said that the increases from the OPEC+ meeting last week “may be a little short” of what is needed to keep the market balanced. Analysts are now speculating that he or other American officials will ask Russia to boost output in order to prevent oil prices from rising too much. Sec. Perry, after all, is set to meet his counterpart, Russian energy minister Alexander Novak, at a natural gas conference in Washington this week. “It’s not a big leap to think he’s going to ask Novak for more oil after today’s commentary," John Kilduff of Again Capital told CNBC. Kilduff noted that such a request would be unusual, “but these are strange times.”
Previously, the U.S. asked Saudi Arabia to boost output to offset declines from Iran.
However, making up for a sudden loss of 1 mb/d, especially when other outages are multiplying, will be exceedingly difficult. In fact, Saudi Arabia and Russia may not be able to account for such sizable losses. That means that the market may have to balance via demand destruction, which is to say, oil prices could be heading much higher.
By Nick Cunningham of Oilprice.com
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