What if US sanctions reduce Iranian exports close to zero?
Most analysts expected the reduction in Iranian exports to be gradual and limited, including Poten & Partners, author of this report.
It was thought the reduction could eventually reach 500-600,000 barrels per day from an average of 2.6 mill barrels per day in 2018 year-to-date.
However, an alternative scenario has been gaining traction, one in which Iranian exports will be reduced even more than during the previous sanctions period.
Reports from the US State Department indicate that the Trump administration is not only looking for reductions in exports, similar to those imposed during the Obama administration but also aims to bring Iranian exports down to zero.
While this may not be a realistic expectation, the US is expected to use its considerable leverage to force rolling reductions in purchases from all buyers of Iranian crude and waivers are conditional on immediate cuts.
The implications of further Iranian export cuts for the tanker market are uncertain; it depends to a large extent on which countries have the spare production capacity to make up the shortfall.
The ultimate impact on tanker tonne/mile demand hinges on the resulting changes in trade flows.
Iran has ample experience in dealing with various kinds of sanctions and even if the US applies maximum pressure on its trading partners, Iran will have various options to keep at least some of its exports flowing.
For example, as sanctions start to bite, it will try to lure buyers with discounts and extended payment terms. To circumvent US banking restrictions, it could accept payment in other currencies or do barter deals and has already agreed to an oil swap with Iraq.
Iran will also be using its own tanker fleet (one of the largest in the world) to move and store crude.
However, despite Iran’s attempts to minimise the damage, early indications are not encouraging for the country. Most international oil companies, especially those with meaningful US operations, have already decided to steer clear from buying Iranian crude.
US allies like Japan and South Korea are under pressure to reduce their purchases. Indeed, South Korea has already dropped imports to zero. Turkey is also a significant buyer of Iranian oil and while they may resist pressure from the US to cut back, they don’t have a lot of room to increase their purchases.
The two countries that could take more Iranian crude are the two largest current buyers - India and China. Combined they imported about 1.4 mill barrels per day over the past three months. India is more likely than China to reduce its imports from Iran under US pressure.
China, which is already embroiled in a trade conflict with the US has less incentive to comply and may import more (discounted) Iranian crude.
So, what happens if US sanctions are so successful that Iranian exports are reduced from 2.6 mill to 1 mill barrels per day by the end of this year?
Unfortunately, the Iranian sanctions are not happening in a vacuum. Venezuela’s production is also falling. The IEA estimates that Venezuela’s production capacity will fall a further 550,000 to around 800,000 barrels per day by the end of 2019.
Angola is also facing challenges maintaining production. In the short-term Libya and Canada are facing production and export hiccups. In our own backyard, the shale oil producers in Texas have problems bringing their growing crude oil flows to market due to pipeline restrictions and port constraints.
Where will the replacement crude oil come from?
The only OPEC countries with significant spare capacity are Saudi Arabia, the UAE and Kuwait.
Industry experts believe that these countries can sustainably increase production by 1.5 –2 mill barrels per day within 12 months; outside OPEC, Russian producers can reverse their voluntary cutbacks, which will add back 300,000 barrels per day.
The bottom-line is: it will be ‘all hands on deck’ for the producers with spare capacity, and in such a scenario, there is a risk of significant price increases.
Higher prices will throttle demand growth, in particular in developing countries, which are already facing headwinds with higher oil prices in combination with a strong dollar.
A slowdown in global oil demand will also have a negative impact on tanker demand, Poten concluded.