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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, Liquid Bulk Principal Analyst, Maritime & Trade, IHS Markit