Iran’s oil exports are once again in the crosshairs after President Trump quit the Iran nuclear deal this week. On May 8, Trump declined to issue sanctions waivers and officially withdrew from the Joint Comprehensive Plan of Action or JCPOA; by law, that move set off a six-month countdown clock for Iran’s customers to cut crude imports or face harsh sanctions. Oil and banking sanctions are to be re-imposed starting November 5, 2018.
The goal is to gradually restrict Iranian crude exports over time.
Trump is convinced that Iran will come begging for a new deal or buckle under the pressure. The Europeans and Iranians, for their part, are preparing for the worst, while they scramble to salvage the JCPOA. Meanwhile, OPEC is reassuring markets that it is ready to respond to any supply disruption.
Trump’s bold gamble has set off a series of moves and counter-moves that will cast a shadow over oil markets for months if not years. Iran’s oil customers have been given 180 days to cut imports “substantially,” although there is no magic number or target. Those countries that do so can pursue sanction exceptions from the State Department. The current 180-day period will turn over in early November and thereafter Iran’s customers will be called on to cut exports again to secure another round of exceptions. The goal is to gradually restrict Iranian crude exports over time.
But how long will it take? Will the Europeans cooperate like they did last time, leading up to 2012? How will China and India—Iran’s biggest customers—react now that they consume half of Iran’s oil exports? How will Iran respond and how long will it hold out under renewed pressure? Few if any of these questions can be resolved soon. Thus, the stage is set for prolonged uncertainty. Look no further than the wildly different estimates for how many barrels Iran stands to lose.
If you ask Trump, he’s convinced time is on his side. The president’s May 8 speech made clear that he wants a comprehensive deal with Iran that goes beyond the nuclear file. However, the regime in Tehran says there is no grand bargain to be had on non-nuclear issues (terrorism, Iran’s regional posture, etc.) and that the JCPOA can’t be renegotiated. “Iran’s leaders will naturally say that they refuse to negotiate a new deal. They refuse—and that’s fine. I’d probably say the same thing if I was in their position,” Trump said this week at the White House. “But the fact is they are going to want to make a new and lasting deal, one that benefits all of Iran and the Iranian people. When they do, I am ready, willing, and able.”
The toughest sanctions on Iran’s oil trade, energy sector, and Central Bank will be re-imposed on November 5.
Sanctions on metals, currency trade, sovereign debt, and automotive goods, among other activities, will be be re-imposed on August 7. The toughest sanctions on Iran’s oil trade, energy sector, and Central Bank will be re-imposed on November 5. While ratcheting up pressure, U.S. officials say they will coordinate with the Europeans to address nuclear issues and more.
The Europeans are prepared to keep talking, but they aren’t willing to scrap the deal. Leaders from France, Germany and the U.K. are set to pursue a three-pronged strategy in the wake of Trump’s withdrawal. First: they’ll continue working on issues of mutual concern. In recent weeks, the Europeans had pushed an expanded framework to deal with Iran, and they feel the JCPOA is still a viable starting point for a new agreement. Second: they may seek to protect European companies from U.S. sanctions by using the EU’s untested blocking statute. And third: EU members will ask Washington for exceptions. However, these will be hard to come by without import reductions.
EU members will ask Washington for exceptions. However, these will be hard to come by without import reductions.
The Iranians refuse to renegotiate or accept additional limits—but they’re also not rushing to enrich uranium, at least not yet. They’re waiting to see what the Europeans can deliver and what their main oil customers have to say about sanctions. In the coming weeks, Iran’s Foreign Minister Javad Zarif will meet with the remaining signatories of the JCPOA (the U.K., France, Germany, China and Russia) to discuss the path forward. Supreme Leader Ali Khamenei responded to the U.S. withdrawal by calling on the Iranian government to seek a “practical guarantee” from the Europeans and “definite reassurance” from the JCPOA signatories. For Zarif, that means durable sanctions relief, regardless of U.S. threats. He’s holding his breath for the May 17 meeting of EU leaders in Sofia, Bulgaria. According to Reuters, a decision on the EU’s much-hyped blocking statute could be announced then.
Together, China and India imported about half of Iran’s shipments last month, for a combined total of 1.4 million b/d. The Iranians hope they can find some work-around for Chinese refiners.
Iran’s oil and condensate exports reached a record high of 2.7 million b/d in April. Together, China and India imported about half of those shipments last month, for a combined total of 1.4 million b/d. The Iranians hope they can find some work-around for Chinese refiners. The Chinese, by nature, are allergic to U.S. pressure and are probably willing to pay in other currencies if Iran finds that acceptable; they can also set up accounts with zero exposure to sanctions. China imported about 5.5 million b/d in 2012 and it hardly complied with sanctions then. Today it’s importing an astounding 9.6 million b/d. If the price is right and Beijing finds creative solutions, China could ramp up imports from Iran, even if other customers cut ties. EU members imported about 450 thousand b/d from Iran in April. Because the Indians pay Iran in euros using European banks, they’re also waiting to see if the EU rebuffs the U.S.
Oil Minister Bijan Zanganeh has said that he’s ready to offer discounts if that’s what it takes to sell sanctioned crude.
Oil Minister Bijan Zanganeh has said that he’s ready to offer discounts if that’s what it takes to sell sanctioned crude. Others officials say their dusting off their old playbook for circumventing sanctions, although their track record is mixed. “We will use every trick in the book and carry out any method to sell our oil so that our production does not fall,” Platts quoted Iran’s deputy oil minister for international affairs, Amirhossein Zamaninia, as saying on May 7. Through some combination of official guarantees, discounts and skullduggery, officials are convinced they can keep volumes steady. One thing is certain: foreign investment will dry up going forward.
Assuming that sanctions are effective, Iran’s willingness to enter any new understanding with the U.S. may ultimately depend on how long it takes Iran to exhaust all other available options. But how long will that take? The regime’s pain threshold should not be underestimated. Recall that it took three years from when the toughest sanctions were imposed in July 2012 until the JCPOA was agreed to in July 2015. Those sanctions were indisputably effective, having slashed Iranian oil exports by one million b/d, and there’s no doubt they drove the Iranians to negotiate.
Yet 2018 is not 2012. There is no reason to expect a breakthrough in the short- or medium-term because it will take time for sanctions to make an impact, that impact could still be mitigated to some degree, and it will take even longer for the regime in Tehran to come to terms with the actual cost.