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Nick Cunningham

Nick Cunningham

Nick Cunningham is a freelance writer on oil and gas, renewable energy, climate change, energy policy and geopolitics. He is based in Pittsburgh, PA.

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How Much Iranian Oil Can Trump Disrupt?

Oil prices surged following President Trump’s withdrawal from the Iran nuclear deal. So, what happens next?

Trump did not offer any new justification for how Iran was violating the nuclear accord – the IAEA confirmed on May 9 that Iran is in compliance with its nuclear commitments – and offered no Plan B or even a coherent strategy on what comes next. For now, Washington is pursuing confrontation with Iran, and hoping that “maximum pressure” will force Iran to not only abandon any hint of a nuclear weapons program, but also agree to concessions on a range of non-nuclear issues. If history is any guide, there is little chance of this happening, so we are now on a course of escalating confrontation.

The U.S. will re-impose all nuclear related sanctions on Iran, which could begin to disrupt oil flows from the country. There will be a 90-day and 180-day wind down period before sanctions really start to bite, which puts the deadline at early November. However, there is a great deal of disagreement and uncertainty over how quickly and how severely the impact of U.S. confrontation will be.

The U.S. will not have the coalition that shut in 1 million barrels per day (mb/d) of Iranian oil exports prior to the 2015 agreement. The EU, China and Russia have said they are sticking with the deal. Still, U.S. sanctions will loom over private companies from those nations, which could keep them from doing business with Iran. The EU has vowed to protect its companies, and could even pursue trade retaliation if the U.S. Treasury moves to penalize European companies. However, U.S. sanctions will almost certainly deter large-scale investment in Iran’s oil and gas sector for years to come. Related: Energy Storage Gains Washington’s Support

“Since President Trump has not offered an alternative to improve the Iran deal – and instead insists on the need for a “better deal” – snap-back US sanctions are likely to increase tensions on both sides of the Atlantic as the EU navigates a difficult balancing act between its JCPOA commitments and protecting its companies,” Barclays said in a note.

The big question at this point is how disruptive unilateral sanctions from the U.S. will be to Iranian oil flows. The U.S. has advised other countries to “significantly reduce” their purchases of oil from Iran. In theory, some countries could receive waivers from sanctions if they reduce their oil purchases from Iran by some unspecific amount. A 20 percent reduction was an unofficial rule of thumb during the Obama era.

The EU will not be nearly as cooperative with Trump as it was with the Obama administration. The EU had essentially cut its oil imports from Iran to zero the first time around, a scenario that probably won’t be repeated again since the EU supports the nuclear agreement.

Of the 1 mb/d of Iranian supply knocked offline before sanctions were lifted in 2016, “[n]early half of this total was due to a complete EU import ban. This is unlikely to happen this time around as the US has revoked the deal unilaterally and against the will of most other countries. Meanwhile, Saudi Arabia has signaled its willingness to offset possible sanction-related supply outages from Iran,” Commerzbank said in a research note. Both the IEA and Saudi Arabia issued statements saying they will monitor the status of the oil market and step in if a shortage materializes.

Barclays does not see a significant impact on the oil market either. The bank lowered its forecast for Iranian output by 150,000 bpd in 2019, a volume that would be offset by higher shipments from Saudi Arabia.

A lot depends on what Iran does next. A muted reaction from Iran would paint the U.S. as the aggressor, allowing Iran to more latitude to skirt U.S. enforcement. “Importantly, Iranian compliance with its JCPOA obligations may potentially help it find alternative routes to export crude oil to international markets,” Barclays says.

Related: Goldman: Oil Prices To Hit $82.50 By The Summer

Argus Media points out that roughly 70 percent of Iranian oil exports have gone to Asia under annual contracts, which means “meaningful cuts to imports would be unlikely to come in until early next year.”

Still, Iran will feel the pain from U.S. sanctions, even without cooperation from the other international partners. “The major concern in Tehran is not around volumes of crude that it could sell — not in the short to medium term at any rate — but over transfer of payments for those volumes,” according to Argus Media.

Moreover, an increase in supply from Saudi Arabia, for instance, to offset the declines from Iran will also translate into a shrinking volume of spare capacity. “This leaves risk our summer $82.5/bbl Brent price forecast squarely skewed to the upside,” Goldman Sachs wrote in a note. Goldman said it is possible that Iran loses 500,000 bpd by the end of the year, which would push up oil prices by more than $6 per barrel.

By Nick Cunningham of Oilprice.com

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  • Mamdouh G Salameh on May 11 2018 said:
    The fact that President Trump did not offer any new justification for how Iran was violating the nuclear accord is because he has no justification whatsoever.

    The real reason President Trump killed the Iran deal is to please Israel. The decision by President Trump to walk away from the Iran nuclear deal has the hallmark of having been made in Tel Aviv like the decision to recognize Jerusalem as the capital of Israel and was passed to the White House to implement.

    Israel has been prodding the United States to attack Iran’s nuclear installations thus risking war with Iran. Israel which possesses an estimated 80 nuclear warheads does not want Iran or any Arab country to acquire nuclear weapons as they would pose a threat to its security but it doesn’t mind if its own ownership of nuclear weapons poses a threat to the security of others.

    Under the current US-led global order, there is one law for Israel and another for the rest of the world particularly when it comes to Palestine and the Palestinians.

    As to your question as to how much Iranian oil can Trump Disrupt, my answer is an emphatic none. I will explain why.

    Contrary to analysts’ and bank’s projections, Iran will not lose a single barrel of oil exports. More than 75% of Iran’s oil exports go to China and the Asia-Pacific region while the remaining 25% go mostly to the European Union (EU). China, India and other Asia-Pacific region countries as well as the EU are not going to comply with US sanctions and reduce their imports of Iranian crude. While most major buyers of Iranian crude will continue to do so, Japan and South Korea might decide to comply with US sanctions and shun Iranian crude. However, this will be more than offset by increased imports of Iranian oil by China, India and other Asia-Pacific countries as well as the EU.

    The pre-Iran nuclear deal’s sanctions worked against Iran’s oil exports because of a combination of the EU’s sanctions on global insurance companies insuring Iranian oil cargoes and US sanctions on banking making it difficult for Iran to receive payments for its oil imports in petrodollar. The EU is not going to walk away from the Iran nuclear deal and therefore it will not be imposing any sanctions on Iran thus further weakening US sanctions.

    Moreover, Iran will be using the petro-yuan for payment for its oil exports thus bypassing the petrodollar altogether and nullifying the impact of the sanctions.

    And while Saudi Arabia would welcome the opportunity to boost production to offset a so-called decline by Iranian oil exports, other OPEC and non-OPEC members particularly Iraq and Russia respectively would like also to share in this benefit. In such a hypothetical situation, Saudi Arabia would not benefit much and would have, therefore, to balance the benefits from increased production against a collapse of the OPEC/non-OPEC production cut agreement. The agreement buoyed by positive oil market fundamentals has pushed up oil prices above $77 a barrel. A collapse of the agreement risks bringing back glut to the market with very adverse repercussions for the Saudi economy which suffered most from the 2014 oil price crash.

    On balance, I believe Saudi Arabia will not risk the collapse of the production agreement which it has worked tirelessly with Russia to bring it into existence for a short-term benefit just to score points against Iran and to please President Trump.

    Dr Mamdouh G Salameh
    International Oil Economist
    Visiting Professor of Energy Economics at ESCP Europe Business School, London
  • Kr55 on May 11 2018 said:
    The key point is who has business connected to the USA. The Producers that Iran needs to invest in their country to maintain production. The refiners that could buy the Iran crude. The US has power to influence many of these players and make them get out of anything involving Iran.
  • Gideon539 on May 17 2018 said:
    The Archive Mossad Stole shows clearly Iran is in Violation of the JCPOA. Exhibit A: Iran’s JCPOA Clause 14 problem: The requirement for Iran to “address past and present issues of concern relating to its nuclear program,” which is specified in Clause 14 of the JCPOA agreement, was not optional but a clear condition for the deal to take effect. Under the provisions of the deal, Iran was obligated to answer outstanding questions, and only once the IAEA certified Iran’s compliance with this requirement, in December of 2015, could the deal move ahead. Iran lied, so the IAEA conclusion certifying compliance is therefore invalid. A further breach based on the captured archive in Exhibit B: Clause T82 of the JCPOA’s Annex I (about nuclear-related measures) states that Iran will not engage in “activities which could contribute to the development of a nuclear explosive device.” These include “designing, developing, acquiring, or using computer models to simulate nuclear explosive devices.”
    As well, the idea that Iran could take soil samples themselves from Parchin Military Base makes the JCPOA a bad deal on its face. The "deal" its supporters seems to be so proud of allows them to keep working on higher velocity advanced centrifuges, so not being allowed into Parchin [or any military site for that matter] means the Iranians could set up a small cascade and have a lot of HEU to work with to make a nuke warhead for a ballistic missile and the inspectors wouldnt know a thing about it until it was way too late. There are a number of other fatal flaws to the deal, especially the sunset clauses, but I digress. For now. How about the S. Africa, Ukraine, Libya models for giving up weapons? Complete transparency.

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