The Oil Market Response To Renewed US Sanctions On Iran

Written by Argus Media, a member of the Aspect Partner Program and an independent media organization that produces price assessments and analysis of international energy and commodity markets.

The US decision to renege on the Joint Comprehensive Plan of Action (JCPOA) and reimpose sanctions on Iran leaves the rest of Opec with a dilemma. The organisation’s pact with non-Opec producers has succeeded in its nominal aim of bringing commercial oil inventories in the OECD back to the historic ﬁve-year average. It has also helped to move prices back above $70/ bl. But the Opec/non-Opec production deal is morphing into a framework for longer-term co-operation among producers. And the immediate pressure to ease up on supply constraints will be greater should signiﬁcant amounts of Iranian oil be lost to the market again.

The eventual impact of the snap-back of US sanctions on Iran’s oil sector is hard to foresee. Iranian crude exports fell by 1mn b/d after the ﬁrst round was put in place in 2012. But sanctions worked then because the US had help from its allies. “We reduced Iran’s exports by more than 50pc,” former State Department special energy envoy Amos Hochstein says. “It was hard, even with full support from the EU and Asia.” The EU matched its sanctions program with Washington’s and halted Iranian oil imports almost immediately. And the participation of Europe’s insurance industry made it much harder for the rest of the world to secure vessels to ship Iranian crude. Even Japan, still reeling from the aftermath of the massive Tohoku earthquake in 2011 that forced its utilities to rely much more on oil-ﬁred power generation, asked for no special dispensation on Iranian imports outside the waiver system.

The US is now going down a unilateral road, and the effect on Iranian exports is likely to be less that six years ago. EU members are exploring ways to mitigate the impact on their refiners. At least one, Spain’s Cepsa, is still taking delivery of Iranian oil. Some of Iran’s European customers with US assets are in a more precarious position and may halt imports. Total has its 240,000 b/d Port Arthur refinery and Atlantic Trading subsidiary to consider, although it is seeking a waiver related to its presence in the South Pars gas project in Iran. Italian Eni and Spain’s Repsol both have upstream interests in Alaska, the Gulf of Mexico and onshore in the lower 48 states. But China is insistent it will keep buying Iranian oil, as are Indian officials, albeit less publicly. Even Chile’s Enap is taking a cargo this month, the first Iranian crude shipment to the Americas in over a decade.

Iran’s oil minister Bijan Namdar Zanganeh says he expects “no signiﬁcant development with regards to Iran’s exports of oil and condensate”. And should EU governments resist US sanctions, other producers will have less cause to increase output. Saudi Arabia is seeking to “ensure market stability”, oil minister Khalid al-Falih says. Riyadh says it will “work with major producers within and outside Opec as well as major consumers to mitigate the impact of any potential supply shortage”, suggesting that it will not act unilaterally. Saudi Arabia and its allies have worked hard to make the production deal a platform for longer-term co-operation between Opec and its non-Opec partners and will not lightly jeopardize this relationship. One short-term get-out clause is overcompliance with production cut targets. Saudi Arabia, the UAE and Kuwait could increase their collective output by nearly 200,000 b/d and remain within their caps. Any further increases would probably need a decision on quotas at the Opec/non-Opec meeting in Vienna next month. Much hinges on Europe’s reaction in the meantime.

This report is taken from Argus Global Markets, a weekly publication that gives vital insight into the latest international oil market developments. For more information, please visit argusmedia.com.