The full impact of U.S. sanctions on Iran is still to be assessed, as major underlying factors remain opaque.
OPEC’s current fear of an oil glut in 2019, as indicated by investment banks, IEA, EIA and others, might not materialize. Market fundamentals are still strong, especially taking into account that U.S. refineries are ramping up production after maintenance season, while Iranian floating oil will end soon as sanctions are about to hit. Still, one of Iran’s major lifelines could be the current EU approach, which is largely trying to mitigate the effects of U.S. sanctions on European companies and financial operators. The rosy future painted by EU officials however shows severe cracks, while reality on the ground is extremely bleak.
European efforts to protect trade with Iran, as an answer to mitigate U.S. sanctions, are hitting a brick wall. European politicians seem to be out of touch with reality not only in the markets, but also concerning the attitude of several of its member countries. European politicians, mostly working from their shiny offices in Brussels and Strassbourg, seem to be living in an ivory tower, as no real practical support for all their measures has been shown in the respective member states.
The last factor showing the weakness of the EU Iran approach is the fact that no single European country is willing to host a so-called Special Purpose Vehicle (SPV) as they fear the wrath of the U.S. Washington’s influence in real politics and markets is still much larger on a global and even bilateral stage than Brussels wants to admit. Leading European powers – Great Britain, Germany and France – are currently putting pressure on minor league EU member Luxembourg to host the SPV. The latter however is already doomed, as not only is the influence of London on Luxembourg minimal, but the small EU member can hide behind the refusal of Austria to host the SPV too. Brussels is showing a brave face, but it’s likely that Eastern European and Balkan member countries will reject the SPV plans, while Italy and Spain are still in limbo. Statements made by EU Justice Commissioner Vera Jourova that the EU cannot accept that a foreign power takes decisions over our legitimate trade with another country, seem to be very hollow and empty. Related: Abu Dhabi’s Remarkable Energy Diversification
The SPV at present is seen as the lynchpin in the EU moves to save not only their trade with Iran but also the overall JCPOA agreement. At present, Brussels and its main supporters, Paris and Berlin, are trying to keep the JCPOA agreement in place, risking a direct confrontation not only with the U.S. but with most of the Arab world. The SPV has been set up as a kind of clearing house that could be used to help match Iranian oil and gas exports against purchases of EU goods in an effective barter arrangement circumventing U.S. sanctions. The main issue European companies are facing with Iran are currently based on the position of the US dollar in international trade.
Even with full EU support, the SPV, according to most analysts, will not shield EU companies and banks from US sanctions. These will be hefty, for sure much more than the current Iran-EU trade volumes could counter.
A possible failure of the EU SPV proposal would for sure heat up the market very soon. Iran’s main lifeline at present is very weak, Asian markets continue to buy Iranian crude and products, but seem to be heading to zero crude imports when the current U.S. waivers will end. At the same time, the effects of the decision by international financial system SWIFT not to allow any-more deals with Iran already has significantly slowed down trade with Europe. Related: Bakken Prices Crumble On Pipeline Woes
For Iran, the future is looking dark. A European failure would be seen a betrayal, and possibly the end of the JCPOA agreement. An Iranian reaction to this should be expected, as such a failure would strengthen the hardliners in Tehran.
For global oil markets, taking the position of the devil’s advocate, this could be bullish. More clarity on Iranian volumes and possibilities of circumventing the U.S. sanctions, is necessary to assess the perceived oil glut scenarios. OPEC’s leaders will already be taking this into account to set up a production cut agreement early December in Vienna. Iran’s situation will be clearer by that date, leaving Saudi Arabia, Russia, UAE and others, more space to pro-actively counter a real oil glut in 2019. Fundamentals are at present diffuse, but once Europe’s position is clear, one large destabilizing factor is removed with a bang.
The fact that already some major Iranian oil importers in Asia have been very compliant to U.S. threats, such as South Korea, should be a sign that even without a multilateral sanctions approach, Washington is still able to wreak havoc on Iran. Oilprice.com reported this week that no Iranian oil has been imported in South Korea for a second straight month due to the re-imposition of US sanctions. For the first 10 months of 2018, South Korea’s Iran crude imports halved in real terms. South Korea is also having a waiver from the U.S. in place, but reality seems to be different.
By Cyril Widdershoven for Oilprice.com
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Let me first start by correcting some of your misconceptions and mistakes. One is that you are totally wrong in assuming that most of the Arab world is against the Iran nuclear deal. With the exception of Saudi Arabia and UAE (because of the dispute with Iran over the occupied Islands), the overwhelming majority of the Arab countries support the nuclear deal.
Another misconception is that because there is a bit of delay in finalizing the so-called Special Purpose Vehicle (SPV) (or barter trade), the EU might not be able to counter US sanctions on Iran. The EU is steadfast in opposing the sanctions and will challenge the United States to retaliate against them. You may remember how Angela Merkel defied President Trump’s threat of sanctions against Germany if she doesn’t abandon Nord Stream 2. The next day Markel ordered the start of construction of the gas pipeline in its waters and territory ignoring Trump’s threats. The EU has no alternative but to support the nuclear deal and therefore continue to trade with Iran. The alternative is a collapse of the nuclear deal and a return of Iran to full nuclear activities which could lead to war between the US and Iran supported by the likes of Israel and Saudi Arabia.
Your third misconception is that Asian markets seem to be heading to zero crude imports when the current US waivers will end citing South Korea as an example. Only 5% of Iran’s oil exports estimated on average at 2.2 mbd go to South Korea and Japan. Even a total stoppage of South Korea’s purchases of Iranian crude will not harm Iranian exports as these will be more than offset by increases Chinese and Indian purchases.
And while President Trump is claiming victory for the recent slump in oil prices, he should realize that the slump is no more than a realization by the global oil market that US sanctions have so far failed to cost Iranian oil exports a loss of even one barrel. Furthermore, the issuing of sanction waivers to eight countries who didn’t need them in the first place and who would have continued to buy Iranian crude with or without his waivers is the clearest admission by the Trump administration that their zero option is out of reach and that sanctions are doomed to fail. Moreover, the eight recipients of the waivers have neither increased or decreased their purchases of Iranian crude as a result of the waivers.
Oil prices are volatile by definition because they are always subjected to various economic and geopolitical pressures virtually on daily basis. That is why one shouldn’t be surprised to see oil prices shuttling between bull and bear markets all the time.
In October the oil price hit $87 a barrel. Today it is $67. Tomorrow the markets could change from bearish to bullish sending prices up to $80 since the robust fundamentals of the global oil market are still the same as they were in October when the oil price hit $87.
Dr Mamdouh G Salameh
International Oil Economist
Visiting Professor of Energy Economics at ESCP Europe Business School, London
It is well known that Europe cannot defend itself as Germany can not even mobilize for exercises and they have a fifth column so how will they impose their will on the world especially Russia.
If we dont overthink the facts, Europe will trend towards more federalism as they already are but will not aspire to much as there are too many legal challenges to overcome especially with the trade of goods.
The beauty of common law is lost on Europe and with it, any hope of universal trade.