The U.S. has vowed to zero out Iran’s oil exports, and after a surprising display of leniency last November, American officials have signaled that they won’t be as flexible when sanctions waivers expire in May. However, the U.S. government may once again find itself in a bind.
The Trump administration granted eight waivers to countries late last year, allowing them to continue to import a certain amount of oil from Iran for a six-month period. The waivers surprised the oil market – and disappointed Saudi Arabia, in particular – leading to a selloff in oil prices. But the U.S. government felt compelled to grant waivers precisely because the oil market was extremely tight, or at least it appeared that way with Brent trading north of $80 per barrel in October.
This time around, when the waivers expire in May, the Trump administration has vowed things will be different. “We are going to continue our path to get to zero,” Brian Hook, the State Department’s special representative for Iran, said earlier this month, referring to the U.S. government’s stated desire to close off Iran’s oil exports. Hook boasted that Iran’s oil exports had fallen to around 1 million barrels per day (mb/d), down from the 2.7-mb/d peak from last year.
But the Trump administration may be severely limited in its effort to further tighten the screws on Iran – and its lack of flexibility could come down to the administration’s own policies.
The oil market could be too tight by the time the U.S. needs to decide on whether or not to extend the waivers, and the tightness may be the result of the Trump administration’s use of sanctions in an entirely separate part of the world: Venezuela.
It is a little early to say how much oil will be knocked offline in Venezuela from U.S. sanctions, but at least 500,000 bpd of oil exports to the U.S. are immediately in jeopardy. Those barrels will have to find another home. It’s conceivable that the Maduro government could find another buyer for its oil, likely for a hefty discount, but it still needs diluent to process its heavy oil before it is ready for export. Related: The Only Way For The Aramco IPO Is Downstream
Up until recently, Venezuela sourced that diluent from the U.S., but now PDVSA will need to find it elsewhere. The risk is that production declines accelerate because of the inability to process its heavy crude. “Production in Venezuela is likely to decrease by more than the shortfall in exports to the US of approx. 500,000 barrels per day,” Commerzbank wrote in a note on Wednesday. To be sure, Venezuela was expected to suffer from ongoing production declines anyway, but U.S. sanctions could accelerate those losses.
The Trump administration is banking on Saudi Arabia making up for any shortfall. Secretary of Treasury Steven Mnuchin said that America’s “friends in the Middle East will be happy to make up the supply.” But that is far from a foregone conclusion. Saudi Arabia said that it would lower its output to 10.1 million barrels per day (mb/d) in February – below its required ceiling – and keep it at that level through June. Riyadh does not want to ride to the rescue of Donald Trump a second time around.
That means that the oil market could be significantly tighter by the time sanctions waivers expire in May, which could force Trump to back off once again. “The Venezuela sanctions, along with sanctions on Iran’s oil exports, will create a tighter market for heavy crude oil,” said Sara Vakhshouri, the president of SVB Energy International, according to Foreign Policy. “[T]would lead to another round of 180-day U.S. waivers on Iran’s oil exports.” Related: Oil Markets Unmoved By Modest Inventory Build
Moreover, Trump’s aggressive approach towards Iran does not have nearly as much backing as its quest for regime change in Venezuela. While major European powers are leaning towards backing Juan Guaidó, essentially signing off on America’s approach of toppling Maduro, they are very much opposed to the U.S.’ “maximum pressure” campaign in Iran.
In fact, France, Germany and the UK are finalizing the special purpose vehicle (SPV) just this week, a financing mechanism that will allow European companies to skirt U.S. sanctions and continue to do business with Iran. There is debate over how effective the SPV will be, but the effort demonstrates the lengths to which Europe is going to ensure that Iran still enjoys the benefits of the 2015 nuclear deal so as to keep the accord alive.
However, it could be the oil market itself that keeps the U.S. in check. If oil prices rise in the coming months – in part because of American efforts at disrupting Venezuelan oil – then Iran could be spared the worst for a second time.
By Nick Cunningham of Oilprice.com
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