Crude oil prices have surged above US$65 per barrel (A$91/bbl) for the first time in close to six months after the United States threatened to impose sanctions on any nations that continue to buy oil from Iran after 1 May.
After hitting a four-year high of US$76.72/bbl at the start of October, oil prices quickly sunk to their lowest point of $42.53/bbl on Christmas Eve and have been on an uphill battle ever since.
Today marks the first time since late October that the price has been above $65/bbl with the Trump administration’s latest move aiming to restrict Tehran’s oil revenues and curtail its nuclear program.
However, some countries’ reluctance to cut exports to zero and the upcoming OPEC-plus meeting could be the deciding factors on the pace of the oil train.
US gets tough on Iran exports
Giving just over a week’s notice, the White House said it will not renew sanction waivers granted last year to major buyers of Iranian crude – a harsher move than many nations had expected.
Last November, the US reimposed sanctions on Iranian oil exports after US President Donald Trump pulled out of a 2015 accord between Iran and six world powers to curb Tehran’s nuclear program.
China and India were among eight countries that were granted exemptions for six months with several importers expecting the waivers to be renewed.
“It is a surprise that the requirement to cease importing Iranian oil should come at this next May deadline,” Centre for a New American Security director of energy, economics and security Elizabeth Rosenberg told reporters.
“Having only several weeks’ notice before the deadline means there are lots of cargoes booked for May delivery. This means that it will now be harder to get it out by the deadline,” she said.
Iran’s oil exports have already dropped to about 1 million barrels per day from more than 2.5MMbpd prior to the November reimposition of sanctions.
However, US Secretary of State Mike Pompeo said the US wanted to go to “zero across the board” with no plans for a grace period beyond 1 May for countries to comply.
Tight supply concerns
This stringent approach adds to mounting supply concerns in the global oil market, with traders raising scepticism about whether it could backfire in the form of a major spike in oil prices.
Venezuela’s oil shipments have already been wiped out by US sanctions imposed earlier in the year.
Meanwhile, violence and unrest in Libya has further squeezed supply and Saudi Arabia slashed its output on OPEC directions to soften oil’s crashing price late last year.
“The market will be under pressure and the prices will definitely react upward,” Facts Global Energy managing director for the Middle East Iman Nasseri told the media.
However, the White House said it was working with top oil exporters in Saudi Arabia and the United Arab Emirates to ensure the market was “adequately supplied”, with Trump promising in a tweet that “Saudi Arabia and others in OPEC will more than make up” the difference.
“Despite high and fast-rising oil prices and high geopolitical disruption risk, (Trump) is betting the farm that Saudi Arabia and the UAE will contain upward price pressure by more than offsetting Iranian oil,” energy consultancy Rapidan Energy Group’s president Robert McNally told reporters.
Saudi Arabia and other OPEC members have slashed supply dramatically in recent months. Member nations of the international cartel, along with ally Russia, agreed to cut output by 1.2MMbpd, but have exceeded those benchmarks with Saudi Arabia alone reducing production by 800,000bpd.
Stratas senior oil market analyst Ashley Petersen told Bloomberg reporters in a video interview that OPEC-plus nations could “easily come in and fill the gap caused by any reduction in Iran exports”, but this would mean “the end for production cuts”.
Mr Nasseri agreed that Saudi Arabia and the UAE could potentially replace up to 1MMbpd lost due to the crackdown on Iran but said this could eat into the Middle Eastern nations’ ability to respond to future supply shocks.
“They will end up having very little spare capacity left for any other emergency or any other crisis in the oil market,” he said.
Mr Nasseri said he expected OPEC’s next meeting, scheduled in June, will be “very tough”.
“That may be the end of the OPEC-plus agreement in its current format,” he said.
Tehran says it is prepared for the end of waivers, with Iranian media reporting threats by the Revolutionary Guards to close the Strait of Hormuz, a major oil shipment channel in the Gulf.
Ms Petersen said given the size of the strait and the ability of the Iranian Navy, it would be “technically possible for them to close it or at least significantly reduce the shipments through it”.
However, she added that “Iran threatens this every time”.
“What they’re actually saying is, if you physically try and stop our ships that are part of international trade, then we will take that as an act of aggression,” Ms Petersen said.
Italy, Greece and Taiwan – three of the eight countries granted sanction waivers – already stopped loading Iranian barrels before the end of last year, according to shipping data.
However, China, Japan, Korea and Turkey have imported even more oil from Iran than their waivers allowed them to, the International Energy Agency reported.
This means halting purchases in these countries, as well as India, could be a lot more challenging, with a senior administration official from Turkey claiming the US decision will “not serve peace”.
Ms Petersen noted that while some countries made preparations to veer away from Iranian oil, “some have made preparations to pay for the oil in other ways that are exempt from the US financial system”.
“There are banks within China that could handle these transactions and allow the flow of oil still, without being subject to the sanctions because they’re not part of the US financial system,” she said.
“That’s really where we’re going to run into issues if these flows continue when everyone’s expecting it to go to zero.”
“The real risk here is that OPEC fills in the gap and Iranian volumes don’t actually fall that much. Keep in mind we also have Libya, Nigeria and the US not under any sort of production restrictions, all capable of growing this year from last year’s levels,” Ms Petersen added.
Chinese Foreign Ministry spokesman Geng Shuang told reporters that China opposed unilateral US sanctions against Iran and that China’s bilateral cooperation with Iran was in accordance with the law.
South Korean media quoted its foreign ministry as saying the South Korean Government had been negotiating with the US at all levels to extend the waivers and it would continue to make every effort to reflect Seoul’s position until the May deadline.
India’s government has so far declined to comment officially but media reports say refiners have started to seek alternative supplies.
The issue is also expected to come up during Japanese Prime Minister Shinzo Abe’s visit to Washington this Friday.