On the day U.S. sanctions against Iran went into effect, Brent crude traded at US$72.68 a barrel. Today, three weeks later, Brent is down to US$59.59 a barrel and President Trump is congratulating himself on the low oil prices. Instead of shooting up to US$100, oil prices are falling and the U.S. waivers granted to eight large Iranian oil buyers are among the main reasons for this. But how long with the effect of the waivers last?
Bloomberg last week published a round-up of how much each of the seven importers that won waivers are allowed to continue importing from Iran and the numbers suggest these seven countries could continue buying over a million bpd of Iranian crude until the waivers expire next year. However, the key word here is “could”.
Take Japan, for example. One of the world’s top crude oil importers and a large client of Iran, stopped buying crude ahead of the sanctions to improve its chances of scoring a waiver. Now that it has the waiver, Japanese refiners are still not sure they should resume buying Iranian crude, which makes one wonder why they even worked to secure a waiver if they were not going to use it. Yet theoretically, these refiners can import about 100,000 bpd of Iranian crude, down from 165,000 bpd before the sanctions.
South Korea is another reluctant buyer because of its close links with the United States. The country was granted a waiver that would allow it to import Iranian crude at a rate of 200,000 bpd over a period of six months, but refiners have yet to resume imports. Related: Could Oil Prices Fall To $40?
India and China are importing Iranian crude, the former at the allowed rate of some 300,000 bpd, according to order data. The latter, China, was allowed to continue buying Iranian crude at a rate of 360,000 bpd but it also has rights to production from fields in Iran where Chinese companies have stakes, so it may be getting more than that.
India is the country that has had to slash its intake of Iranian crude the most and it is also the country that would have the biggest problem finding an affordable alternative to Iranian crude when the waivers expire. India was lucky pessimistic forecasts for the global economy and indications of oversupply pressured prices, but this may only be temporary: OPEC is talking about production cuts again, after all.
Other importers would also have to find alternative sources of crude that can compete with Iranian crude on prices. These are, to put it mildly, few and far between since Tehran is selling its crude at a discount to maintain market share. Other producers cannot afford to sell at such discounts. So, what happens when the waivers expire?
Importers would have two choices: breach the sanctions and risk Washington’s wrath or switch to costlier crude, which will be even costlier at the time because the end of the waivers will definitely have an impact on prices. These fatter oil import bills won’t do much for these economies’ growth prospects and we just saw last month what pessimistic economic growth prospects do to oil demand outlooks and prices, especially if they concern India and China.
By Irina Slav for Oilprice.com
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