How will US sanctions on Iran impact the oil market?

16/10/2018 Argaam
by Jerusha Sequeira

 

Following the United States’ withdrawal from the Iran nuclear deal this year, fresh sanctions are set to go into effect on the Middle Eastern country’s petroleum sector on Nov. 4. While other OPEC producers could compensate for the loss of Iranian crude by increasing production or using spare capacity, analysts told Argaam this could create a supply crunch in the event of an unexpected disruption.

 

Earlier this year, American president Donald Trump pulled the country out from a 2015 agreement that saw Iran limit its nuclear activities in exchange for sanctions relief. As a result, the US has reinstated sanctions on Iran.

 

The first round of sanctions, which went into effect in August, bans any transactions with Iran involving US dollar bank notes, gold, precious metals, aluminum, steel, commercial passenger aircraft and coal. They also target US of Iranian carpets and foodstuffs.

 

The second set in November will target Iran’s crude oil sales and transactions with its Central Bank.

 

Argaam takes a closer look at the potential impact of these sanctions on the global oil market.

 

1) What will happen to Iran’s oil exports?

 

Since the US withdrawal from the Iran deal in May, Iran’s exports have fallen by 804,000 barrels per day (bpd) as of August, with clear signs of inventory builds, said Ehsan Khoman, head of MENA Research and Strategy at MUFG Bank.

 

“We view that the more aggressive US stance in this sanctions cycle to force a further 350k-500k bpd of Iranian crude off the market by November, with the exceptions mainly stemming from China and Turkey, both unlikely to significantly reduce their imports of Iranian crude,” he added.

 

However, recent media reports suggest that Iran is reviving the use of various means to keep up exports under sanctions, such as cloaking crude oil exports through “ghost tankers.” This refers to oil tankers turning off their Automatic Identification System (AIS) geolocation transponders to avoid satellite detection. While ships are required by international maritime law to use AIS, Iranian oil tankers are increasingly shutting off their transponders to obscure their location and destination, making it tougher to track them and determine exact export volumes.

 

Samir Madani, co-founder at TankerTrackers.com, confirmed the phenomenon to Argaam.

 

“I already see it intensifying. They are changing their MO almost daily,” he said, cautioning that a lot of ‘faulty data’ is being published on Iranian exports. “Everyone's rushing out their headlines instead of waiting for the vessels to appear back online days after their departure.”

 

2) Will other producers be able to compensate for the removal of Iranian crude barrels from the market?

 

Saudi Arabia and other producers like the UAE, Kuwait and Russia, have the capability and willingness to compensate for lost Iranian oil, analysts said. OPEC and Russia have already been returning previously cut barrels to the market to make up for losses from Iran from coming months.

 

“The combination of spare production capacity, inventories of crude oil (and product) and export capacity suggests that Saudi Arabia alone looks capable and willing of replacing the overwhelming share of lost Iranian crude oil for the foreseeable future,” Khoman said. The Kingdom currently produces 10.7 million barrels per day (mbd) and has 1.3 mbd of spare production capacity on hand, he added.

 

However, using spare capacity to meet market demand means that OPEC+ members will find it tougher to tackle any unexpected production outages.

 

Joseph Gatdula, head of oil and gas analysis at Fitch Solutions., said that while Saudi Arabia has, on paper, sufficient capacity to keep the market in balance, it may not be in its longer-term interests to hike production.

 

“An increase in output leaves the market with less slack, posing significant upside risk to prices should a separate supply-side shock hit the market,” he said.

 

3) How are Iran’s customers reacting?

 

In a recent note, Germany’s Commerzbank said the oil market risks a “noticeable tightening” of supply in Q4 as Iran loses buyers for its oil. South Korea and Japan have already completely halted their purchases, while India has indicated that it will cut imports significantly.

 

Elsewhere, European states are reluctant to comply with the sanctions, but the withdrawal of companies from Iran for business reasons will likely force Europe to also scale back Iranian oil purchases.

China was previously thought to be immune to US sanctions, but its largest state oil processing company significantly reduced purchases from Iran last month, Commerzbank said.

 

4) How will oil prices be affected?

 

Fitch Solutions estimates that the impact of sanctions is already largely priced by the market; therefore, no significant spike in Brent prices is expected as a direct result of the sanctions going into effect. The consultancy maintains its core forecast for crude price averaging $80/bbl for 2018 and $82.0/bbl over 2019, although volatility will increase as producers reduce spare capacity to offset Iran’s lost output, Gatdula said

 

MUFG, meanwhile, notes several risks to supply, such as limited room for OPEC+ producers to raise production to counter unexpected disruptions, and US supply-side risks due to the hurricane season.

 

“[There is] at least an upside risk of Brent and WTI exceeding north of $85/bbl and $80/bbl, respectively, in the coming weeks, depending on the magnitude of these events, and how they impact the overall supply-demand equilibrium balance,” Khoman said.

 

5) Are waivers likely to be extended to major oil-producing countries?

 

The US will likely grant waivers in return for steep cuts in imports from Iran, Gatdula said. This is due to a mix of the strong pushback from Iran’s buyers like India, the prospect of rising oil prices, and the unwillingness or inability of other OPEC members to raise production sufficiently to plug the supply gap.

 

“However, it is likely that the extent of these waivers be very limited, adding upside risk to prices as more barrels come out of the markets,” he added.

 

Madani also said it was likely the US would grant waivers to some countries, due to the difficulty of finding substitute sources for specific grades of oil.

 

Write to Jerusha Sequeira at jerusha.s@argaamnews.com

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