The truth about Iran oil sanction waivers
The Trump administration has dropped the hammer, officially putting sanctions on Iran’s oil exports. Why, then, might Iran’s oil exports actually increase in the near future?
The US granted waivers to eight countries, allowing them to continue to import oil from Iran for a six-month period. Washington spun the waivers as a brief period of time that would allow a handful of countries to get their imports from Iran down to zero. Some countries really depend on Iran, so a six-month grace period would give them a bit more leeway.
The US government was a bit defensive about the action. “No one’s going to argue that Secretary Pompeo isn’t tough on Iran,” Secretary of State Mike Pompeo said on “Fox News Sunday.” “And no one is going to argue that President Trump isn’t doing the same.” He cited the loss of around 1 million barrels per day of Iranian oil exports as evidence that the policy was working. “That number will fall farther.”
Yet the President himself revealed the logic behind the waivers. “We have the toughest sanctions ever imposed but on oil we want to go a little bit slower because I don't want to drive the oil prices in the world,” President Trump told reporters on Monday. “I could get the Iran oil down to zero immediately, but it would cause a shock to the market.” It’s highly debatable that the US could have succeeded in slashing Iran’s oil exports to zero, but even if it did succeed, there is little doubt that oil prices would be substantially higher than they are today.
The eight countries granted waivers included South Korea, Taiwan, Turkey, Greece, Japan, China, India and Italy. Many of these countries had already made sharp reductions in their purchases of Iranian oil, which allowed them to curry favor with Washington as they sought some leniency on sanctions.
Notably, however, South Korea and Japan had already zeroed out their imports from Iran well ahead of the deadline. The waivers for them, then, are a bit curious. The Trump administration may have wanted to reward allies that had been cooperative. However, it could also allow them to resume purchases of Iranian oil.
Japan’s trade minister, Hiroshige Seko, said on Tuesday that Japanese refiners could begin buying oil from Iran again, now that they have a six-month exemption. South Korea could also import around 130,000 bpd from Iran again, which is notable since South Korea hasn’t purchased oil from Iran since June, according to the IEA.
Some Chinese refiners who also cut their purchases are interested in buying oil once again, according to Reuters. China will be allowed to buy around 360,000 bpd, which is about half of what the country imported over the past two years. An unnamed trader told Reuters that “enquiries for cargoes from Iran are...coming in from several Asian buyers.”
Combined, the exemptions will allow Iran to continue to export oil, and it might even be able to increase exports from current levels. Iran exported somewhere around 1.6-1.7 million barrels per day in October, and according to S&P Global Platts, might export around 1.1 mb/d in November. But the losses could potentially stop there, and might even rise if some countries resume purchases.
It is “likely that Iranian oil exports will stabilise at their present level of a good 1 million barrels per day,” Commerzbank said in a note. “Exports could even increase again in the coming months because Japan and South Korea have hardly been buying any Iranian oil of late amid uncertainty ahead of the sanctions and as a gesture of goodwill towards the US.” The investment bank said the waivers and the potential increase in shipments to Asia is bad news for oil prices.
There is quite a bit of disagreement over the trajectory of Iran’s exports. Citi’s Ed Morse told Bloomberg TV that oil prices are actually “biased to the upside” for the rest of the year. Morse said that oil prices could average $80 per barrel in the fourth quarter and might even spike to $90 or $100. He noted that whether or not such scenarios play out largely depend on Iran, as well as some other potential outage.
And while the market is suddenly bearish on oil because of Iran waivers, Morse notes that the waivers are only temporary and that the Trump administration won’t allow countries receiving waivers to import unlimited quantities. “How much oil is being granted from Iran to each of those eight countries? We can only surmise until we get a tweet from somebody in the government,” Morse told Bloomberg TV.
Other analysts agreed with that sentiment. “We do not see [the eight countries] having carte blanche to import what they like,” the consultancy FGE said in a note.
The bottom line is that there is not a lot of clarity regarding what to expect on Iran’s exports. The US waivers could allow exports to stabilize and perhaps even edge up temporarily. However, the Trump administration is keen on tightening the screws. The waivers expire in May, and surely the US wants Iran’s exports to be lower by then.
Nevertheless, Washington will only be able to move as fast as the oil market allows, which, after months of bluster, is something that the administration finally recognizes.
“We will ensure that as more barrels of Iranian crude and condensate come off the market, that we accomplish our national security objectives without increasing the price of oil,” Brian Hook, head of the State Department's Iran action group, told reporters on a conference call. “We have a high degree of confidence that we will be able to do both.”
That’s the goal, but it remains to be seen if the oil market is loose enough to allow for that harder line on Iran.