American sanctions have been successful at slashing Iran’s production and exports. In March, Iran’s oil production stood at 2.74 million barrels per day (Mbd), down 1.1 Mbd since the U.S. re-imposed sanctions in May of last year, according to the International Energy Agency (IEA). The IEA said that Iranian oil and condensate exports stood at 1.4 Mbd in March, about half of the level from last May.
With the expiration of the waivers now just a little more than two weeks away, the oil market is on edge as the White House weighs its next steps.
However, the losses from Iran have contributed to a rapid increase in oil prices this year, with Brent up more than 30 percent. With the expiration of the waivers now just a little more than two weeks away, the oil market is on edge as the White House weighs its next steps.
U.S. sanctions hit Iran
Iran’s oil production is at the lowest level in about five years, but it has also held steady for much of 2019. The U.S. granted waivers to eight countries ahead of the November 2018 deadline, allowing them to continue to buy oil from Iran at reduced levels. The waivers surprised the oil market, which had been taking the White House at its word regarding its promise to lower Iranian oil exports to “zero.” In fact, the OPEC+ coalition had decided to increase production in the second half of 2018 in anticipation of the more severe outages in Iran. Oil prices crashed after the U.S. issued waivers.
The six-month reprieve would, in theory, offer the U.S. government and the oil market more time. The Trump administration has stated that “maximum pressure” on Iran, and the campaign to cut Iran’s oil exports to “zero,” is still official policy.
However, the Trump administration is once again constrained by the tightening oil market, which is at least partly the result of U.S. sanctions on Venezuela. Iran and Venezuela have together lost about 700,000 barrels per day (b/d) since November.
Iranian oil exports are on track to drop to new lows in April, according to early estimates from Reuters, a sign that the eight countries that received waivers – China, India, Greece, Italy, Taiwan, Japan, Turkey and South Korea – have begun to trim purchases ahead of the expiration of their waivers. Reuters estimates that crude shipments have averaged below 1 Mbd so far in April, down from around 1.1 Mbd in March.
Brian Hook, the top U.S. official on Iran sanctions policy, said earlier this month that at least three countries have already zeroed out their imports of Iranian crude, likely referring to Italy, Greece and Taiwan. The U.S. could allow waivers for those three countries to lapse without much consequence, but the other five pose a larger problem. A number of analysts have argued that some sort of extension is likely. “We think there are very high chances that China and India and perhaps Turkey will receive (fresh) waivers, but with further cuts,” said Sara Vakhshouri of energy consultant SVB Energy International, according to Reuters.
Iran pressure or oil prices?
The U.S. government is reportedly divided on what to do next. A group of hardliners, including National Security Advisor John Bolton, prefer to let the waivers expire in an effort to pursue the “zero” export policy. Others, including Secretary of State Mike Pompeo, argue that another extension is needed in order to avoid roiling oil markets.
Across the U.S., gasoline prices are on the rise. For the week ending on April 15, average retail gasoline prices hit a six-month high at $2.828 per gallon, up more than 25 percent since the start of the year. Brent crude is above $70 per barrel, down from the multi-year highs reached in the fourth quarter of 2018, but still high enough to raise concerns in the White House. The Trump administration’s twin goals of low gasoline prices and maximum pressure on both Iran and Venezuela, appear to be inherently at odds.
To top it off, turmoil has erupted in Libya once again. The Libyan National Army is in the midst of an attack on Tripoli, a campaign that by mid-April appears to have stalled. The fighting threatens to disrupt Libyan oil supply, but to date that has not occurred. A significant outage would put more upward pressure on oil prices.
Meanwhile, whatever the Trump administration decides, it could have further knock-on effects on the oil market. OPEC+ is waiting to see what comes out of Washington before it decides whether or not to extend the production cuts through the end of the year. Russia has already sent signals that it is uncomfortable with over-tightening the market, even as Saudi Arabia is more determined on keeping the cuts in place.
The Trump administration could theoretically pursue maximum pressure on Iran by denying waiver extensions, which would likely send oil prices shooting up, which would then put pressure on OPEC+ to unwind the production curtailments. However, relying on OPEC+ to ride to the rescues is a risky bet, especially since Saudi Arabia was reportedly upset last November after the Trump administration surprised them with Iran sanctions waivers.
It’s a tricky calculus for the White House, and either way the Trump administration will have to compromise on some of its objectives. It could choose to prioritize maximum pressure on Iran, at the risk of an oil price spike. Or, it could try to preserve oil market stability, which may require easing up the pressure on Iran.