The US said on Monday that it won’t extend the sanctions waivers for eight countries importing crude oil from Iran. The move could remove around 1.1 million barrels per day from the market.
Although Rystad Energy anticipated a further tightening of sanctions, the details in the announcement have led us to revise our forecast downward for Iranian crude production.
Rystad Energy forecasts that production will drop to 2.27 million bpd for the second half of 2019, reaching this level by July 2019, which equates to a drop of 0.43 million barrels per day (bpd) from current March 2019 levels.
The net effect for the oil market is bullish, as the market will lose more supply from Iran, mostly of medium-sour and heavy-sour quality.
“However, Saudi Arabia and several of its allies have more replacement barrels than what would be lost from Iranian exports in a worst case scenario. This should limit the positive impact on crude prices,” says Rystad Energy Head of Oil Market Research, Bjørnar Tonhaugen.
“Since October 2018, Saudi Arabia, Russia, the UAE, and Iraq have cut 1.3 million bpd, which is more than enough to compensate for the additional loss. However, realistic spare capacity will be cut significantly, reducing room for error in Libya, Nigeria, and Venezuela,” Tonhaugen added.
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Rystad Energy says that Iranian crude exports have dropped from around 2.5 million bpd in April 2018 to around 1.1 million bpd currently.
“In our new base case, we no longer expect India to buy Iranian oil after May 2019, and now only expect China and Turkey to continue purchasing Iranian cargoes. We lower our Iranian crude exports estimate from 900,000 bpd to 600,000 bpd from May 2019 onwards, allocating around 500,000 bpd of exports to China and the remainder to Turkey,” Tonhaugen remarked. Related: Solar Stocks Are Booming This Year
The density and sulfur content of the main crude grades exported by the “four cutters” – Saudi Arabia, UAE, Iraq and Russia – are of similar quality to Iran’s main export grades, Iranian Heavy and Iranian Light.
“Saudi Arabia, Russia, the UAE, and Iraq will have no problem replacing Iran’s crude grades, such as Iranian Heavy, Iranian Light, and West Kharoon,” Tonhaugen said. “We believe that Saudi Arabia has ample capacity of Arab Light especially, which is a grade of similar quality to Iranian crudes, due to the current production cuts. Russian Urals and Iraq’s Basra Light is also comparable to Iranian crude quality, while UAE’s main export grades are somewhat lighter and sweeter than Iran’s.”
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By Rystad Energy
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Moreover, Saudi Arabia has made it clear that it is not going to raise its oil production until it is sure that Iranian oil exports are actually falling and that the global oil market is irrevocably re-balanced and oil prices are headed to $80 a barrel or higher being the price it needs to balance its budget.
Surging oil prices are underpinned by bullish influences currently at play such as a strong global oil demand adding 1.45 million barrels a day (mbd) this year over 2018, rock solid Chinese oil imports projected to hit 11 mbd this year, a Chinese economy growing at 6.4% this year beyond the projected 6.3%, a confirmed slowdown in US production and a tightening global oil market caused by OPEC+ production cuts.
If these bullish influences stay with us this year, then oil prices could hit $80 a barrel or even higher this year.
Still, the end of US sanction waivers will have very negligible impact on oil prices and global oil supplies in the long term for three reasons.
The first is that US sanctions against Iran’s oil exports have so far failed to cost Iran the loss of even one barrel of oil. Iranian crude oil exports averaged 2.125 mbd in 2018. Therefore, the claim by Rystad Energy that Iranian crude exports have dropped from around 2.5 mbd in April 2018 to around 1.1 mbd currently is false and self-delusional masquerading as research.
The second is that the eight largest buyers of Iranian crude oil who were given US sanction waivers last November with the exception of South Korea and Japan will continue to buy Iranian crude with or without waivers. And contrary to claims by Rystad Energy, India will never stop buying Iranian crude oil since it doesn’t recognize US sanctions and furthermore, it is getting a very good deal from Iran.
The third reason is that without waivers, Japan and South Korea which account for 14% of Iranian oil exports may have to stop importing some 300,000 b/d. However, this will be more than offset by increased purchases from China, India and Turkey.
Dr Mamdouh G Salameh
International Oil Economist
Visiting Professor of Energy Economics at ESCP Europe Business School, London