It was the kind of policy announcement that at first sounds straight-forward, but quickly grows more complicated.
On April 22, the Trump administration announced it would not renew waivers that had been granted to eight countries allowing them to keep importing Iranian crude.
The US reimposed sanctions on Iranian oil sales in early November, but issued six-month waivers to buyers of Iranian crude.
Iran’s crude exports have fallen from about 2.5 million barrels per day to 1 million bpd.
“This decision is intended to bring Iran’s oil exports to zero, denying the regime its principal source of revenue,” the White House said in a statement.
For such outspoken Iran hawks, the waivers stood out like a sore thumb, allowing Iran to export crude to a group of buyers that includes US allies.
Yes, Iran’s oil exports fell by more than half, but as the graph below shows, tanker activity continued around the country’s main export terminal.
There were even some increases in ship traffic around Kharg Island, causing draws in crude storage levels in February.
Ursa measures global crude inventories on a weekly basis using synthetic aperture radar.
Source: Ursa, Spire
It shouldn’t have come as a surprise, but the White House announcement on April 22 to end waivers still jolted the oil market, offering an early glimpse of the complications ahead.
Crude futures began the week hitting 2019 highs. A few days later, ICE Brent was flirting with $75 per barrel, up from a low of $50/b on December 24.
The strength in Brent’s term structure has also been notable, reflecting the view that the market will tighten further once the US ends Iran-related waivers.
Source: ICE via MarketView
For now, White House officials are insisting that enough supply exists globally to offset the loss of Iranian barrels.
“The world is awash with oil,” economic advisor Larry Kudlow said April 23, arguing oil prices shouldn’t rise because of the decision on Iran.
Secretary of State Mike Pompeo listed the names of a few producers who he said should be able to fill the void.
“Both the Kingdom of Saudi Arabia and the United Arab Emirates have assured us they will ensure an appropriate supply for the markets,” he said.
“And of course, the United States is now a significant producer as well.”
The biggest uncertainty for the market is how quickly the Saudis might respond — if at all — to any supply shortfall from Iran.
In public, Saudi Arabia hasn’t exactly confirmed Pompeo’s statement.
Energy minister Khalid al-Falih said his country had no plans to immediately raise production next month, but would supply more oil to customers, if needed.
Keep in mind, al-Falih’s hands are somewhat tied.
Saudi Arabia committed to holding production below 10.3 million bpd through the end of June, as part of a coordinated agreement between OPEC members, Russia and other producers.
Saudi oil production in April is around 9.8 million bpd, according to Saudi officials.
US pressure might convince Saudi Arabia to let the supply cut agreement expire at the end of June. The parties to that agreement meet June 25-26 in Vienna to discuss the next steps.
If restrictions are lifted, how high could Saudi output go?
Aramco recently revealed information about its operations for the first time as part of its international bond prospectus.
Production could average a maximum of 12 million bpd over a year, with three months notice to make operational adjustments, according to the prospectus.
Saudi crude production hit an all-time high in November 2018 above 11 million bpd.
More importantly, this record was accomplished without Saudi drawing down its inventories at home.
Source: Ursa, JODI
Saudi domestic storage was fairly balanced last summer and autumn, despite the ramp-up in production culminating in November, according to our data.
Another facet to consider when thinking about the loss of Iranian barrels is the physical market.
Refiners must find crude types with similar enough characteristics to the Iranian grades, ensuring operations run smoothly.
This won’t be the first time, of course.
In 2011-12, the US and European Union imposed sanctions on Iranian oil. Former buyers replaced those barrels with crude grades from Saudi Arabia, Kuwait, Nigeria, Angola and Iraq.
But make no mistake. The White House has created a logistical headache.
The five countries still importing Iranian crude (China, India, Japan, South Korea and Turkey) were given less than two weeks to stop those purchases or else risk falling under US sanctions.
Washington might backtrack slightly and extend short-term waivers as a transition period, according to Richard Nephew of the Columbia University Center on Global Energy Policy.
One likely determinant will be oil prices.
Will Trump hold firm on Iran even if it causes higher prices at-the-pump?
Whatever the outcome, we’ll continue to monitor this domino effect for our clients using data derived from SAR intelligence.