Response to Iran sanctions threatens OPEC unity; prompts Iranian threats

• Published date: 01 June 2019
• DOI: http://doi.org/10.1111/oet.12715
• Date: 01 June 2019

LOOKING AHEAD

Response to Iran sanctions threatens OPEC unity; prompts

Iranian threats

US sanctions have hit oil exports from Venezuela and Iran,

which has tightened the global market and split OPEC—

with other members pledging to help make up any shortfall.

In response, Iran has threatened to disrupt oil flows from

the Persian Gulf, and there have been a series of related

incidents that have further supported prices. The outlook

remains uncertain, but with Iran's economy severely threat-

ened by the sanctions, it is under considerable pressure to

take further action.

In late April, the Trump administration unexpectedly

announced it would cease Iranian oil export sanctions

exemptions that it had granted to eight countries in

November, when Iranian sanctions were first imposed.

The market widely expected Washington to extend the

waivers for five of the countries. Iranian crude exports

were at 1.4 mn bd in April (and total output 2.57 mn bd).

This is expected to fall sharply, but not to zero, with

China and possibly India/Turkey likely to keep buying

some barrels.

This was preceded by a tightening of US sanctions on

Venezuela in late January, which led to a fall in exports there

from 1.25 mn bd in December (down from 2.4 mn bd 2 years

earlier), to below 800 000 bd in April. Most of this fall has

been to US Gulf coast refineries, where imports dropped to

zero at the end of April, from over half a million bd in

December. Further falls in Venezuelan exports are expected

to 500 000 bd, with some supply to Chinese and Russian

buyers, including a Russian-owned refinery in India,

continuing.

The fall in both countries' exports is set to cut supply

by over 1 mn bd. However, the White House said it

had received assurances that the Saudis and UAE would

plug any shortfall in oil supply from Iran—both coun-

tries had been eager for the United States to tighten

sanctions, and have already begun to raise export alloca-

tions. Saudi Arabia has a total production capacity of

12.5 mn bd, and in April produced under 10 mn bd,

highlighting its ability to balance the market, although it

also needs to consider its internal state budgets (which

require oil nearer $80/bl, and so some continuation of

supply constraint).

In response, Iran has angrily criticized its fellow OPEC

members, especially Saudi Arabia, and has threatened to

shut the Straits of Hormuz, which could affect 16 mn bd

of crude flow from the Gulf. In 2008, worries that Iran

would blockade the strait helped push oil prices up to

record levels of $147/bl—although market conditions are

very different today. Nevertheless, if Iranian action

succeeded in stopping traffic for any length of time, or if

there were to be any damage to the 7 mn bd Saudi oil

processing facility of Abqaiq, prices would no doubt rise

sharply again.

Indeed, prices did rise toward $75/bl for Brent in late

April and into May, following attacks by unidentified

attackers on four oil tankers near ports on the UAE side of

the Strait of Hormuz. Two Saudi oil tankers were damaged

off the coast of Abu Dhabi, and another UAE-flagged vessel

and another Norway-flagged ship were hit near Fujairah.

While the attackers' identity was unclear, they were thought

to be linked to Iran.

A few days later, Saudi Aramco's key East-West oil pipe-

line suffered some limited damage from armed drones and

had to be temporarily shut-down. The pipeline runs from the

country's oilfields and processing facilities in the east to the

Red Sea and has a capacity of about 5 mn bd, although cur-

rent through-put is estimated at around 2 mn bd. The line is

critical to Saudi Arabia's Red Sea refineries, and is an essen-

tial alternative route to the Strait of Hormuz.

The second attack illustrated the reach of potential

Iranian-linked threats, with Yemeni Houthis thought to be

responsible—a television station run by the group reported

that it had launched drone attacks on Saudi installations. The

entrance to the Red Sea (the Bab el-Mandeb Straits) could

also be vulnerable to attacks by Yemeni Houthis. Some in

the Saudi administration see the attack as another reason to

clamp down on the Houthis in Yemen, which could further

heighten tensions.

The situation suggests there may be little unity at OPEC's

next full meeting on June 25 in Vienna, and potentially little

future for the group—with founding members Venezuela

and Iran set against the rest, or at least Saudi Arabia and its

allies (a number of others are keen to raise output, but for

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