How much Iranian oil can Trump disrupt?

Nick Cunningham
Oil rig

Oil prices surged following President Trump’s withdrawal from the Iran nuclear deal. So, what happens next?

Trump did not offer any new justification for how Iran was violating the nuclear accord – the IAEA confirmed on May 9 that Iran is in compliance with its nuclear commitments – and offered no Plan B or even a coherent strategy on what comes next.

For now, Washington is pursuing confrontation with Iran, and hoping that “maximum pressure” will force Iran to not only abandon any hint of a nuclear weapons program, but also agree to concessions on a range of non-nuclear issues. If history is any guide, there is little chance of this happening, so we are now on a course of escalating confrontation.

The U.S. will re-impose all nuclear related sanctions on Iran, which could begin to disrupt oil flows from the country. There will be a 90-day and 180-day wind down period before sanctions really start to bite, which puts the deadline at early November.

However, there is a great deal of disagreement and uncertainty over how quickly and how severely the impact of U.S. confrontation will be.

The U.S. will not have the coalition that shut in 1 million barrels per day (mb/d) of Iranian oil exports prior to the 2015 agreement. The EU, China and Russia have said they are sticking with the deal. Still, U.S. sanctions will loom over private companies from those nations, which could keep them from doing business with Iran. The EU has vowed to protect its companies, and could even pursue trade retaliation if the U.S. Treasury moves to penalize European companies. However, U.S. sanctions will almost certainly deter large-scale investment in Iran’s oil and gas sector for years to come.

“Since President Trump has not offered an alternative to improve the Iran deal – and instead insists on the need for a “better deal” – snap-back US sanctions are likely to increase tensions on both sides of the Atlantic as the EU navigates a difficult balancing act between its JCPOA commitments and protecting its companies,” Barclays said in a note.

The big question at this point is how disruptive unilateral sanctions from the U.S. will be to Iranian oil flows. The U.S. has advised other countries to “significantly reduce” their purchases of oil from Iran. In theory, some countries could receive waivers from sanctions if they reduce their oil purchases from Iran by some unspecific amount. A 20 percent reduction was an unofficial rule of thumb during the Obama era.

The EU will not be nearly as cooperative with Trump as it was with the Obama administration. The EU had essentially cut its oil imports from Iran to zero the first time around, a scenario that probably won’t be repeated again since the EU supports the nuclear agreement.

Of the 1 mb/d of Iranian supply knocked offline before sanctions were lifted in 2016, “[n]early half of this total was due to a complete EU import ban. This is unlikely to happen this time around as the US has revoked the deal unilaterally and against the will of most other countries.

Meanwhile, Saudi Arabia has signaled its willingness to offset possible sanction-related supply outages from Iran,” Commerzbank said in a research note. Both the IEA and Saudi Arabia issued statements saying they will monitor the status of the oil market and step in if a shortage materializes.

Barclays does not see a significant impact on the oil market either. The bank lowered its forecast for Iranian output by 150,000 bpd in 2019, a volume that would be offset by higher shipments from Saudi Arabia.

A lot depends on what Iran does next. A muted reaction from Iran would paint the U.S. as the aggressor, allowing Iran to more latitude to skirt U.S. enforcement. “Importantly, Iranian compliance with its JCPOA obligations may potentially help it find alternative routes to export crude oil to international markets,” Barclays says.

Argus Media points out that roughly 70 percent of Iranian oil exports have gone to Asia under annual contracts, which means “meaningful cuts to imports would be unlikely to come in until early next year.”

Still, Iran will feel the pain from U.S. sanctions, even without cooperation from the other international partners. “The major concern in Tehran is not around volumes of crude that it could sell — not in the short to medium term at any rate — but over transfer of payments for those volumes,” according to Argus Media.

Moreover, an increase in supply from Saudi Arabia, for instance, to offset the declines from Iran will also translate into a shrinking volume of spare capacity. “This leaves risk our summer $82.5/bbl Brent price forecast squarely skewed to the upside,” Goldman Sachs wrote in a note. Goldman said it is possible that Iran loses 500,000 bpd by the end of the year, which would push up oil prices by more than $6 per barrel.