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Tsvetana Paraskova

Tsvetana Paraskova

Tsvetana is a writer for the U.S.-based Divergente LLC consulting firm with over a decade of experience writing for news outlets such as iNVEZZ and…

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Is The Oil Market Ready For Sanctions On Iran?

Oil market participants and analysts will be intently watching the Trump Administration over the next month. May 12 is the deadline for the U.S. President to decide to waive sanctions on Iran as part of the nuclear deal that global powers reached with Iran in 2015, allowing Tehran to resume oil exports and regain part of its market share.

The re-imposition of sanctions on Iran’s oil is not 100-percent certain, although the probability is high, various analysts say. The potential loss of Iran’s oil exports varies from zero to 1 million bpd, according to investment banks and analysts.

Iranian sanctions could add between $2 and $10 to oil prices this year, analysts polled by Bloomberg say.

The oil market—now at its tightest state in years—would feel an Iranian oil supply disruption much more than it would have felt it just a year or so ago when the global oil glut was more than 340 million barrels.

With the oil overhang in developed economies now virtually eliminated, the possible threat to supply from Iran is one of many geopolitical factors analysts are watching — Venezuela’s oil production and the possible escalation of the situations in Syria and Yemen are other high profile examples.

Without all those geopolitical concerns, market fundamentals alone hardly justify such high oil prices, some analysts say.

But here we are— the geopolitical risk premium is back in the oil market, and fears of supply disruptions, especially in the Middle East, are driving oil prices up.

Analysts have their reasons to believe that President Trump won’t waive Iran sanctions this time around.

President Trump warned in January when he waived the sanctions that it was the last such waiver, “but only in order to secure our European allies’ agreement to fix the terrible flaws of the Iran nuclear deal.”

Related: IMF: Expect Oil To Fall Below $60

Since that waiver, President Trump has appointed a new National Security Advisor, John Bolton, who is extremely hawkish when it comes to Iran.

“The fact that there’s been a change of personnel in both the White House and the State Department pushes the probability up. It would have some impact on price, in the third and fourth quarters, on a couple-of-dollar basis. It’s a good even bet that it will or will not happen in May,” according to Ed Morse, global head of commodities research at Citigroup.

Earlier this week, Citigroup raised its 2018 and 2019 oil price forecasts by $5 to $6 per barrel for Brent, on the back of potential loss of supply from Iran and further Venezuela production losses. Citigroup now expects Brent to average $65 a barrel this year and $55 per barrel next year.

It’s uncertain how much Iranian oil could be removed from the market in case of no-waiver in May. According to Citigroup, it could be anywhere from 200,000 bpd to 1 million bpd if the Iran nuclear deal collapses.

Mike Wittner, head of oil market research at Societe Generale, tells Bloomberg that there is a 70-percent chance of Iran oil sanctions returning, which would have a $10 a barrel impact on oil prices, of which $5 is already priced in. SocGen’s base-case scenario is sanctions implemented in two to three months after May 12, and removing 500,000 bpd of Iranian oil, “much less than in 2012.”

According to Fereidun Fesharaki, chairman of energy consultancy Facts Global Energy (FGE) and a former energy adviser to the prime minister of Iran in the 1970s, there is a 90-percent chance of the Trump Administration walking out of the nuclear deal. This could lead to “sanctions within 180 days, but markets have not priced it in.”

Saxo Bank said in its Q2 quarterly outlook that the appointment of Bolton increases the risk of the U.S. slapping fresh sanctions on Iran, and those restrictions “would likely reduce the country’s ability to produce and export crude oil at the current rate.”

“We expect to see Brent crude remain mostly stuck within the established $10 range with tough U.S.-Russia tensions and U.S. sanctions against Iran potentially giving it a temporary boost towards $75/b. Geopolitical risk spikes can be vicious but tend to lack longevity. Unless supply is threatened, such spikes could add extra non-OPEC barrels while potentially raising growth and demand risk,” Saxo Bank said.

Related: The Bullish And Bearish Case For Oil

Iran is bracing for sanctions, and moved this week to begin using the euro instead of the U.S. dollar for its foreign currency data references. Sara Vakshouri, head of consultancy SVB Energy International, told Platts that this move could be an attempt to curb the impact of fresh sanctions by taking the dollar out of transactions, but it is unlikely to completely protect Iran from sanctions.

“With regard to the oil purchases, as part of its market share policy under sanctions, Iran might agree to receive its oil payments in the local currency of the importers or to received goods and/or services in return for its oil,” Vakshouri told Platts, but noted that Iran’s economy as a whole would be affected even if Tehran is able to continue selling oil internationally.

“Unilateral and multilateral restrictions and sanctions will have their own negative impacts on Iran’s economy, even if it is still able to continue oil exports”, Vakshouri noted.

One thing is certain about possible Iranian sanctions—at present their impact on Iran’s oil exports and the global oil markets is highly uncertain and will keep the market on edge at least until May 12.

By Tsvetana Paraskova for Oilprice.com

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  • Kshithij Sharma on April 21 2018 said:
    The sanctions on Iran works only if Saudi and its allies cooperate. Else, it is doomed to fail. Iran is a medium sized oil supplier. Though it exports just 2MBPD, the supply cuts from other make this more significant.
  • Mamdouh G Salameh on April 22 2018 said:
    The probability of President Trump walking away from the Iran nuclear deal on the 12th of May and re-imposing sanctions on Iran is high. Still the global oil market should take a relaxed attitude towards its potential impact on oil supplies and oil prices.

    Three reasons for that: one is that Iran’s oil exports will not lose a single barrel of oil. The second is the petro-yuan which virtually nullifies the petrodollar and the third reason is barter trade.

    The pre-nuclear deal sanctions worked because of a combination of the European Union’s (EU) sanctions on insurance companies insuring Iran’s oil export cargoes and US sanctions on banking affecting Iran’s payment for its exports. The EU is not going to withdraw from the nuclear deal and Iran will be paid in petro-yuan since the majority of its exports go to China. It will also accept barter trade deals with India and Russia and other countries thus nullifying US sanctions on banking and also bypassing the petrodollar.

    While geopolitical concerns could add $2-3 to a barrel of oil, they are mostly factored in by the global oil market. Oil prices are heading towards $75 in 2018 on the strength of the very positive market fundamentals even without help from geopolitical concerns.

    The major game changer is the petro-yuan which enables oil producers to bypass the petrodollar and virtually nullifies the impact of US sanctions.

    US sanctions are becoming a sort of irritation but with no bite. They have not stopped the Russian economy growing nor have they led to the collapse of Venezuela. Certainly their impact on Iran’s oil industry and economy will be virtually nil.

    Dr Mamdouh G Salameh
    International Oil Economist
    Visiting Professor of Energy Economics at ESCP Europe Business School, London
  • bea bea on April 22 2018 said:
    lets look back a bit. When a barrel of oil was 135.00
    gas was 1.35. Today gas is double . Okay, a litre today
    is 1.22.9 and the barrel is around 68.00 more or a little less.
    So oil and gas have been switched. We the people get it
    put to us. It's tantamount to playing a football game and
    when losing, change the rules. It's no wonder people lose
    it. The problem is, they're losing it on the wrong people.
  • A.N. on May 03 2018 said:
    Iran could stop selling oil to the countries who puts sanctions on them, China needs more oil.
  • Jack Ma of the Land on May 04 2018 said:
    Sanctions do not really work unless the nations being sanctioned are trading oil using the dollar. Iran has bilateral trade agreements with Russia and China so any move in oil prices based on so called sanctions is just another farce by the USA empire of lies. IMHO

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