November 5, 2018
At 11:59 p.m. ET on November 4, the remaining sanctions on Iran’s energy, ship building, shipping, and banking sectors that had been lifted or waived under the JCPOA came back into full effect. Iran’s oil exports and revenue are a major part of the administration’s strategy to spur change in Iran on the part of the regime. Speaking during a briefing on November 2, US Secretary of State Mike Pompeo discussed sanctions on Iran, declaring that, so far, the reduction in Iranian oil exports since the US withdrew from the JCPOA in May has far exceeded expectations because “maximum pressure means maximum pressure.”

What effects will the official end of the 180-day wind-down period have on global markets? As sanctions against Iran come into full effect, Global Energy Center experts weigh in on the market context and what to expect.


Ellen Wald, senior fellow with the Atlantic Council’s Global Energy Center

“Oil market analysts and traders will be keeping a close eye on Iran’s oil exports now that latest round of US sanctions on Iran’s oil industry have begun. Forecasts have varied widely as to how much oil we can expect to come off the market. Predictions have ranged from as little as 300,000 barrels per day to as high as 1.5 million barrels per day. For reference, when sanctions were first announced in May, Iran was exporting a self-reported 2.7 million barrels per day.

“By August, Iran’s observed exports had dropped to a two and a half year low, and oil prices had risen to new highs. The Trump Administration pressure on China, India, South Korea, and Japan appeared to be paying off. Triple digit oil prices by the end of 2018 did not seem out of the question. In the spring and summer the Trump Administration pressured Saudi Arabia to increase production as it feared higher gasoline prices hitting American consumers just in time for the November elections.

“By the end of September, however, it became clear that Iranian oil exports would not be entirely cut off by November. Data on Iran’s exports showed an increase in September to 2.2 million barrels per day, with October exports on track to show similarly high numbers. At the same time, Saudi Arabia’s exports increased, Libyan production grew and US production defied expectations and rose to over 11 million barrels per day. Oil markets reacted to this information by dropping $11 per barrel over the month of October. The high prices feared by the Trump Administration have not appeared.

“Now that it has become clear that the Trump Administration plans to offer some temporary exemptions to importers of Iranian oil, the market can expect a brief reprieve, but more volatility should be expected into 2019.”


Brenda Shaffer, senior fellow with the Atlantic Council’s Global Energy Center

“The oil market has been responding in recent days more to press releases than actual changes in market fundamentals. The fundamentals indicate that a number of price spikes are still ahead in the last months of 2018. Geopolitical risks galore can still knock out production, such as in Iran, where domestic unrest is on the rise, including in Iran’s main oil producing region—Khuzestan.

“Declarations today by Secretary of State Mike Pompeo and Secretary of the Treasury Steve Mnuchin that condensates will also be sanctioned represent a further departure from Obama-era sanctions. Sanctions against condensates may affect Iran more than the loss of revenue from crude exports, as the loss of condensate export will inhibit Iran’s ability to produce natural gas. Thus, in the coming months there could be expected supply disruptions not only to Iran’s domestic production of heat and power, but also shortages in gas exports to Armenia and Turkey.

“US elections on Tuesday are also beginning to play a clearer role in the market. Last week’s sanction waivers to eight countries have kept the oil price stable with imposition of sanctions a day before the US midterms. The waivers will be temporary and keep the oil market calm for the time being while also delaying the impact on importers of Iranian oil for a few weeks, but these conditions will change. Iran is also taking a “wait and see” attitude in response to the US sanctions, hoping for a Democratic win, which would lead to constraints on President Trump and potentially affect is ability to fully carry out his Iran policy.”


David Mortlock, senior fellow with the Atlantic Council’s Global Energy Center

“On Friday, November 2, Secretary Pompeo granted exceptions to eight countries to allow them to continue to import Iranian crude oil and other petroleum products from Iran without the threat of secondary sanctions. The use of the exception tool was no surprise. Just as in 2012, when it was first used, the goal of the exception in the National Defense Authorization Act of 2012 is not to sanction those buying oil, but rather deny Iran its revenues. Getting those eight countries to reduce their oil sales—and others to also terminate purchases completely—is a win for the administration’s sanctions policy.

“However, it is unclear that the reductions, and the additional sanctions that go back into effect Monday, will have the desired policy outcome. The oil removed from the market over six months—approximately 1 million bpd—roughly equals that removed by the Obama Administration prior to the JCPOA. And a tightened oil market and rising prices soften any economic blow to Iran. While the additional sanctions will go back into effect on Monday, Iran still enjoys broad political support from the rest of the P5+1 and their continued efforts to keep Iran in the nuclear deal. Indeed, the EU has touted several efforts, even if primarily political statements, to blunt the impact of the new US sanctions on trade with Iran. It is questionable whether the administration can replicate the pressure that brought Iran to the table in the face of a unified political front from the P5+1 under the current environment, nevermind the pressure necessary to get Iran to the table to negotiate on Secretary Pompeo’s much broader list of demands.”


Helima Croft, managing director and head of global commodity strategy, research at RBC Capital Markets; and board director of the Atlantic Council

“The most punitive economic sanctions on Iran snap back at 11:59 p.m. ET on November 4, and it seems certain that they will remove more barrels from the market this time than in 2012. While the Trump Administration is going it alone this time, it will likely prove to be very effective because of the White House’s resolve to fully deploy the coercive tools at its disposal. A corner of the market continues to believe that the effects will be more muted because of a liberal waiver policy or massive evasion by Iranian “ghost ships,” but senior administration officials have insisted that enforcement will be strict.”

“Additionally, while the Obama Administration never sought to take Iran out of the oil market, but rather sought to get them back to the bargaining table, the Trump Administration is still publicly seeking to take Iran as close to zero as possible. This administration has granted fewer SREs (eight versus twenty under Obama) and in order to qualify for such an exception, countries have already had to make significantly higher reductions—in some cases they are already near zero. Moreover, reductions will likely climb when the next round of SRE discussions commences in six months’ time. While the administration will fall short of its stated goal to take Iranian exports to zero, 1.3–1.7 mb/d of Iranian exports will still likely roll off the market by Q1 2019.

“In regard to Iran’s response to the sanctions snapback, an immediate Iranian nuclear restart or an intensification of Iranian support for regional proxy groups is less inevitable than it might have been previously. In fact, Iran’s leadership may opt to exercise strategic patience while its regional rival Saudi Arabia deals with the international fallout over the death of Washington Post writer Jamal Khashoggi. How long Iran will remain on the sidelines while its economy is being battered is an open question, but for now it seems it may air on the side of caution in order keep the spotlight focused on Saudi Arabia.”


Randy Bell, director of the Atlantic Council’s Global Energy Center

“Whether intended or not, the Trump Administration’s policies and rhetoric have been key drivers of the fluctuations in oil price since the June OPEC meeting. Indeed, Saudi Arabia’s support for the administration’s withdrawal from the JCPOA played a significant role in OPEC’s decision to increase production, which helped temper oil prices over the summer despite fears about how many Iranian barrels would ultimately come off the market. Then in the early fall, US signaling of a hard line approach to sanctions drove prices back up.

“Recently, however, continued administration-driven trade tensions have dampened demand, helping to bring prices back down to pre-withdrawal levels. This, combined with the decision to grant eight countries temporary waivers on their imports of Iranian oil, suggests that the impact on the market may not be as severe as previously thought, at least for now.

“After the US midterm election on Tuesday, the dynamics may change and other drivers may become more salient. The administration will continue its push to zero Iranian barrels on the market while still working to keep oil prices from spiking, but even as Saudi Arabia and Russia are producing at record levels, OPEC and its non-OPEC partners have signaled an interest in output limits and a formalization of the so-called “Vienna Alliance” at their next meeting in December. While President Trump has said he hopes for a deal with China, it is unclear if President Xi would rather wait out the next two years and hope for a more accommodating negotiating partner in 2021, much like the Iranians seem prepared to do regarding the re-imposition of sanctions. And of course, any number of other issues, including Libyan and Venezuelan production, could still throw the market into turmoil.  

“Now that Washington has played its cards after six months of market speculation about the administration’s approach, the next six months are more likely to be shaped by others, whether it’s OPEC and its partners deciding to buoy prices, China’s decisions regarding trade, Iranian efforts to circumvent sanctions, or political crises in producer countries. That is, of course, unless the administration throws another market-impacting curveball, which never seems out of the question.”


You can follow Ellen Wald (@EnergzdEconomy), Brenda Shaffer (@ProfBShaffer), David Mortlock (@yotus44), and Helima Croft (@CroftHelima) on Twitter.

 

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