Surprising market again, the Trump administration announced on Monday that it would not renew the six-month Iran oil sanctions waivers as market previously expected and all countries that continue to import Iranian oil after May 2 will then be subject to US sanctions. The timing of the halt is much more sudden and earlier than most people thought, driving the Brent and WTI crude oil prices up by 3.2% and 2.8% respectively from last week closing.
The decision could be a part of Trump’s maximum pressure strategy, which intended to bring Iran’s oil exports to zero – the main source of revenue for the country, and then force Iran back to the negotiating table.
Meanwhile, the sanction waivers were granting to eight countries, including China, India, Japan, Taiwan, South Korea, Turkey, Italy and Greece. Of which, Greece, Italy and Taiwan have already stopped importing Iranian oil, while China and India remain the two largest importers of Iranian oil.
Would this lead to a spike in oil price over the long-term?
The current decision for ending the waivers could lead to a loss of up to 1.5 million barrels per day (mb/d) of Iranian oil supply to the global market. However, the actual impact could be smaller than this number as China, India and Turkey have immediately indicated an opposition of unilateral sanctions from US, and as a result these countries may not fully comply with U.S. demands to quit buying Iranian oil.
According to Goldman Sachs forecasts, the impact on Iran’s oil exports could only be limited to 0.9 mb/d, which is much smaller than the 2.6mb/d potential loss as feared in last October. For instance, China may need to maintain a minimum of 200 kb/d of oil imports due to oil project partnership and investment repayments in-kind with Iran, while some Iranian oil could be repackaged to appear as Iraq exports too.
On the other hand, Saudi Arabia, the United Arab Emirates, and the other major producers are said to make up for the loss of Iranian oil due to the end of the waivers. They have shown up a 2.0 mb/d of spare capacity available for the market at present, and this is set to rise further to up to 2.5 mb/d by early 2020. With a better supplied market next year, the recent oil price spike may proof to be short-lived, not to mention the looming debottlenecking of the Permian, the largest and lowest-cost shale basin, is expected to take place in 2H19.
Overall, the unexpected end of the waivers is likely to cause an upside risk for crude oil price in the near-term, in particular if crises in Venezuela and Libya – another two major oil supplying countries, turn to be more severe and potentially resulting insufficient spare capacity to replace the supply disruption. However, over the long-term, as global crude and shale production continue to rise, we have a neutral view on the asset class.