United States unexpectedly cancels Iran sanctions waivers; puts pressure on market, Mideast tensions

• DOI: http://doi.org/10.1111/oet.12686
• Published date: 01 May 2019
• Date: 01 May 2019

LOOKING AHEAD

United States unexpectedly cancels Iran sanctions waivers;

puts pressure on market, Mideast tensions

The United States will end all waivers from Iran oil sanc-

tions when they expire on 2 May 2, against most analysts’

expectations—driving crude prices to 6-month highs, with

Brent moving above $74/bbl on 23 April. Iran responded

with a threat to close the Strait of Hormuz, the world’s busi-

est oil transit choke point, although the United States

repeated commitments to keep it open.

The Trump administration said it aims to “bring Iran’s oil

exports to zero, denying the regime its principal source of

revenue.”US Secretary of State Mike Pompeo said the

United States would strictly enforce the sanctions and moni-

tor compliance. He said support in the form of additional

barrels to replace lost Iranian supply was expected from

Saudi Arabia and UAE, and rising US oil production had

also helped in making the decision, with anticipated growth

of 1.5 mn bd in 2019.

Saudi energy minister Khalid al-Falih said that the coun-

try would “coordinate with fellow oil producers to ensure

adequate supplies are available to consumers while ensuring

the global oil market does not go out of balance.”President

Trump tweeted that Saudi Arabia and others in OPEC will

“more than make up the oil flow difference in our now full

sanctions on Iranian oil.”

Nevertheless, the United States move could push oil

prices up further given supply issues elsewhere in Venezu-

ela, Libya, and to some extent Iraq, where southern exports

fell by nearly 300 000 bd in March (partly due to flooding),

further tightening sour crude markets. Venezuela’s exports

fell below 800 000 bd in March due to US sanctions and

political instability, while Libya’s 1.1 to 1.7 mn bd produc-

tion is currently being threatened by renewed civil war.

1|SUBSTANTIAL CUT

Iranian oil exports averaged more than 1.7 mn bd in March,

which would be a significant loss to the market, although

most observers believe some oil will keep flowing.

China is currently the biggest buyer and has voiced oppo-

sition to the United States move, along with Turkey. China

has the ability to avoid damage from sanctions, so it may

keep buying some bbl—whereas others are more exposed

and likely to quit, although India has long-standing trade

relations with Iran and may try and continue to buy a little

too. In March, China imported nearly 628 000 bd* (Energy

Intelligence estimates this at 750 000 bd, while data provider

Kpler pegs them higher still, at 830 000 bd). More than

357 000 bd went to India, according to S&P Global Platts

cFlow.*

Japan and South Korea, which each accounted for 13%

of Iran’s Q1 exports, will almost certainly halt trading with

Iran when their waivers expire. Turkey, despite its’opposi-

tion, may also wish to avoid US sanctions, while Italy,

Greece, and Taiwan never used their waivers. Before recov-

ering over recent months, Iranian exports had dipped below

1.06 mn bd in November, when the United States first re-

imposed sanctions, down sharply on 2 mn bd in November

2017. Iran has had to sell at a discount since November to

ensure the crude is moved, including payment in local

currencies.

Other buyers of Iranian energy include its neighbor, Iraq,

which buys gas and power amounting to over 4GW. Iraq

does not appear ready to stop and has plans to pay in Iraqi

dinars instead of dollars using an Iraqi bank, which would

avoid violating US sanctions. In the short term there is little

alternative, although longer term greater domestic gas output

and Saudi power imports are being looked at.

If the sanctions are effective, a cut anywhere near

1.7 mn bd wo uld exhaust the oil market’s spare capacity in

Saudi Arabia and UAE at a time when risks to oil supply

elsewhere are also high. Until recently, Saudi had cut output

sharply to support prices, as part of the December

OPEC/non-OPEC agreement, cutting production to

9.87 mn bd in March, its lowest output since February 2017.

2|HEIGHTENED SECURITY RISK

After the US announcement, Iran threatened to shut down

the Strait of Hormuz: “According to international law, the

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