Crude Oil Trade: No resurrection for Iran

Waivers from US sanctions on Iranian barrels will expire on May 2, as scheduled. President Donald Trump decided not to reissue any exceptions, as announced in a statement by the White House recently. The Trump administration has proved to be much more decisive than earlier anticipated and now proceeds with a rather tough decision intended to bring Iran's oil exports to zero. The same announcement added that the US, along with OPEC members were "Committed to ensuring that global oil markets remain adequately supplied. We have agreed to take timely action to assure that global demand is met as all Iranian oil is removed from the market".

Since the US re-imposed sanctions on Iranian crude oil, the economic pressure against Iran has increased. But the waivers granted to eight countries (China, India, Japan, South Korea, Taiwan, Turkey, Italy and Greece) allowed Iran to export about one million barrels per day (bpd), much lower than the roughly 2.5 million bpd it was exporting last year. With around 40% of Iran's revenue, or as much as USD 50 billion, coming from crude oil exports, the regime is now expected to face significant difficulties. The decision in November was only targeting to provide time to allies and partners of the US to switch away from Iranian oil, without causing any dramatic effect to the then well-supplied oil market.

However, this decision must have been a surprise, at least for parts of the global market. Without any waivers extended, Iranian exports are now set to collapse, potentially supporting further increases of already high oil prices, with the impact to be felt by all economies around the world. The market anticipated the US to become tougher by simply forcing countries earlier waived to reduce flows from Iran, which would make the transition to other suppliers rather smooth, with only limited moves to be felt on oil prices and shipping. This could have been compensated by similar increases in oil production and exports from OPEC members, primarily Saudi Arabia. But for now, the Kingdom and the cartel seem rather evasive, having avoided so far to make any reference to output increases from their side. Without doubt, Saudi Arabia's negotiation power is now much stronger, but the country might test how far higher oil prices could be pushed.

Meanwhile, sanctions on Venezuela and the instability in the Maghreb, with the situation in Libya looking rather problematic, does not allow for much optimism in terms of global supply levels. We still expect crude oil imports from Iran to continue, but the volumes will be pushed much lower than current levels. Higher prices cannot be positive news for the tanker shipping sector, as experience has proved in the past. Moreover, Iran has been threatening to block the Hormuz Straits if the US proceeds with full restrictions on Iranian barrels. This could be a massive risk for the global supply, as at least a fifth of the world's flows pass through the region. Any disruption would affect flows from major exporters, including Iraq, Kuwait and Saudi Arabia.

The first immediate response came from the oil prices, which spiked on Monday, by more than two per cent. With the summer driving season approaching for the US, Americans are rather concerned due to the high uncertainty around global oil prices, with the majority now expecting to face much higher prices than a year ago.

Focusing on the importing countries, Turkey and Japan are expected to easily find alternatives, but potentially at a higher cost. But the big issue is South Korea, which could be hit hard due to the grades it needs. The Far Eastern country is primarily interested in ultra-light condensate used in petrochemicals, with some of the supply already being replaced by US volumes. However, prices are not that competitive as they would have been if the country could continue importing from Iran.

The even bigger question is the reaction of China and India, globally ranked second and third in terms of consumption. Beijing expected exceptions to be extended as its cooperation with Iran has been "open, transparent, reasonable and legitimate", as a Foreign Ministry spokesman Geng Shuang recently commented. The US previously allowed China to import 360,000 bpd, while India was permitted 300,000 bpd. Replacing these Iranian barrels might prove rather difficult, unless major producers, members of OPEC, will cover the gap. In case, Saudi Arabia does not increase its production to compensate for losses from Iran, the oil price could be pushed much higher.

The only positive news for the US comes from Russia, with several signals having been sent that the country is not on board with an "uncontrolled" price increase, as Vladimir Putin recently stated. With Washington ensuring the world that Saudi Arabia and the UAE have agreed to increase production, Moscow has no reason to follow the OPEC+'s agreement after June. A potential increase in Russia's output and exports could eliminate the impact of Iran's collapse.

Posted 26 April 2019 by Fotios Katsoulas, Associate Director, Lead Analyst Tanker Shipping & Alternative Fuels, S&P Global Commodity Insights