Oil market participants and analysts will be intently watching the Trump Administration over the next month. May 12 is the deadline for the U.S. President to decide to waive sanctions on Iran as part of the nuclear deal that global powers reached with Iran in 2015, allowing Tehran to resume oil exports and regain part of its market share.
The re-imposition of sanctions on Iran’s oil is not 100-percent certain, although the probability is high, various analysts say. The potential loss of Iran’s oil exports varies from zero to 1 million bpd, according to investment banks and analysts.
Iranian sanctions could add between $2 and $10 to oil prices this year, analysts polled by Bloomberg say.
The oil market—now at its tightest state in years—would feel an Iranian oil supply disruption much more than it would have felt it just a year or so ago when the global oil glut was more than 340 million barrels.
With the oil overhang in developed economies now virtually eliminated, the possible threat to supply from Iran is one of many geopolitical factors analysts are watching — Venezuela’s oil production and the possible escalation of the situations in Syria and Yemen are other high profile examples.
Without all those geopolitical concerns, market fundamentals alone hardly justify such high oil prices, some analysts say.
But here we are— the geopolitical risk premium is back in the oil market, and fears of supply disruptions, especially in the Middle East, are driving oil prices up.
Analysts have their reasons to believe that President Trump won’t waive Iran sanctions this time around.
President Trump warned in January when he waived the sanctions that it was the last such waiver, “but only in order to secure our European allies’ agreement to fix the terrible flaws of the Iran nuclear deal.”
Since that waiver, President Trump has appointed a new National Security Advisor, John Bolton, who is extremely hawkish when it comes to Iran.
“The fact that there’s been a change of personnel in both the White House and the State Department pushes the probability up. It would have some impact on price, in the third and fourth quarters, on a couple-of-dollar basis. It’s a good even bet that it will or will not happen in May,” according to Ed Morse, global head of commodities research at Citigroup.
Earlier this week, Citigroup raised its 2018 and 2019 oil price forecasts by $5 to $6 per barrel for Brent, on the back of potential loss of supply from Iran and further Venezuela production losses. Citigroup now expects Brent to average $65 a barrel this year and $55 per barrel next year.
It’s uncertain how much Iranian oil could be removed from the market in case of no-waiver in May. According to Citigroup, it could be anywhere from 200,000 bpd to 1 million bpd if the Iran nuclear deal collapses.
Mike Wittner, head of oil market research at Societe Generale, tells Bloomberg that there is a 70-percent chance of Iran oil sanctions returning, which would have a $10 a barrel impact on oil prices, of which $5 is already priced in. SocGen’s base-case scenario is sanctions implemented in two to three months after May 12, and removing 500,000 bpd of Iranian oil, “much less than in 2012.”
According to Fereidun Fesharaki, chairman of energy consultancy Facts Global Energy (FGE) and a former energy adviser to the prime minister of Iran in the 1970s, there is a 90-percent chance of the Trump Administration walking out of the nuclear deal. This could lead to “sanctions within 180 days, but markets have not priced it in.”
Saxo Bank said in its Q2 quarterly outlook that the appointment of Bolton increases the risk of the U.S. slapping fresh sanctions on Iran, and those restrictions “would likely reduce the country’s ability to produce and export crude oil at the current rate.”
“We expect to see Brent crude remain mostly stuck within the established $10 range with tough U.S.-Russia tensions and U.S. sanctions against Iran potentially giving it a temporary boost towards $75/b. Geopolitical risk spikes can be vicious but tend to lack longevity. Unless supply is threatened, such spikes could add extra non-OPEC barrels while potentially raising growth and demand risk,” Saxo Bank said.
Iran is bracing for sanctions, and moved this week to begin using the euro instead of the U.S. dollar for its foreign currency data references. Sara Vakshouri, head of consultancy SVB Energy International, told Platts that this move could be an attempt to curb the impact of fresh sanctions by taking the dollar out of transactions, but it is unlikely to completely protect Iran from sanctions.
“With regard to the oil purchases, as part of its market share policy under sanctions, Iran might agree to receive its oil payments in the local currency of the importers or to received goods and/or services in return for its oil,” Vakshouri told Platts, but noted that Iran’s economy as a whole would be affected even if Tehran is able to continue selling oil internationally.
“Unilateral and multilateral restrictions and sanctions will have their own negative impacts on Iran’s economy, even if it is still able to continue oil exports”, Vakshouri noted.
One thing is certain about possible Iranian sanctions—at present their impact on Iran’s oil exports and the global oil markets is highly uncertain and will keep the market on edge at least until May 12.
By Tsvetana Paraskova for Oilprice.com
