How Bad Is Iran’s Oil Situation?

“There’s a really big gap between what foreign governments are saying and what companies are saying.”

By Nick Cunningham, Oilprice.com:

The U.S. government has continued its attempts to shut down Iran’s oil exports, and in recent days Iranian officials responded by threatening to block the Strait of Hormuz. Such an outcome is highly unlikely, but the war of words demonstrates how quickly the confrontation is escalating.

Oil prices spiked in late June when a U.S. State Department official said that countries would be expected to cut their imports of oil from Iran down to “zero.” The official also suggested that it would be unlikely that the Trump administration would grant any waivers.

This hard line stance fueled a rally in oil prices as the oil market was quickly forced to recalibrate expected losses from Iran, with a general consensus changing from a loss of around 500,000 bpd by the end of the year, to something more like 1 million barrels per day (mb/d), or even as high as 2.0 to 2.5 mb/d in a worst-case scenario in which all countries comply.

A loss of that magnitude would be hard to offset, even if Saudi Arabia decides to burn through all of its spare capacity.

That led to a dialing back of the rhetoric from the Trump administration, or so it seemed. A follow-up statement from the State Department suggested that the U.S. government would work with countries on a “case-by-case basis” to lower Iranian oil imports. High oil prices seemed to put pressure on Washington.

But for now, there is no policy shift. “I think there’s going to be very few waivers. That’s what we’re hearing all the time from officials across the administration. I think it’s a very strong policy decision,” Brenda Shaffer, an adjunct professor at Georgetown’s School of Foreign Service, told Oilprice.com.

Time will tell, but early evidence suggests that the Trump administration is having success convincing top buyers of Iranian crude to curtail their purchases.

South Korea reportedly plans on zeroing out its imports of oil from Iran in August, according to Reuters. Sources told Reuters that Japan plans on buying oil from Iran for the next few months, but will likely come under pressure to cut imports as the November deadline approaches.

Iran managed to keep exports from being adversely affected in June, with volumes mostly unchanged, although higher condensate exports offset a decline in crude oil exports, according to S&P Global Platts. Export flows to Europe fell sharply as European refiners cut back, which is significant since Europe accounts for about a third of Iranian sales. South Korea, Japan and Taiwan bought more Iranian oil in June, offsetting the decline to Europe. But, as mentioned before, South Korea plans on eliminating those purchases later this summer.

The real battle will be convincing India and China to play along. India has reportedly advised its domestic refiners to prepare for a “drastic reduction or zero” imports from Iran. China, for now, remains in defiance of U.S. demands, and Beijing doesn’t recognize U.S. sanctions on Iran.

The European Union, which still hopes to keep alive the nuclear deal with Iran, had initially hoped to shield Iran from the worst effects of U.S. sanctions. The foreign ministers of the UK, China, France, Germany and Russia held talks on July 6 with Iran’s foreign minister in an effort to keep the nuclear accord alive. But that will only be possible if Iran can receive the benefits of the deal, which includes exporting oil. The group of world powers hope to put together an economic package that helps Iran enough to keep Iran in compliance with the nuclear deal.

But it will be a difficult task since European companies are walking away from Iran even as their governments insist they will support their investments. “What I hear from oil and gas companies, no one is taking a risk from being cut off from the U.S. financial market. So I think there’s a really big gap between what foreign governments are saying and what companies are saying,” Brenda Shaffer of Georgetown’s School of Foreign Service said. She cited the case of Total SA, the French oil giant that pulled out of Iran despite assurances from European governments that they would be protected from U.S. sanctions.

All of that is to say that by all accounts, a significant chunk of Iranian oil exports will be interrupted over the second half of this year. The economic pain will add even more pressure on a government that is already struggling with an increasingly restive populace.

One other thing to keep an eye on are the protests underway in Iran. “The demonstrations taking place in Iran are very very serious, and many of them right now are focused in the oil producing areas. Over the weekend there were incredible demonstrations in Abadan, which is like the heartland of Iranian oil production,” she said. “So we might have two things going on, which is not just the limitations on the exports, but they might have some serious production problems if these demonstrations continue to escalate. I think that is something that is completely realistic.”

Either way, as oil exports start to feel the pinch, Iran’s back could be against the wall. Iranian officials said this week that they might block the Strait of Hormuz if their oil exports are blocked. “Around 17 million barrels per day or 35 percent of all seaborne oil exports pass through the strategic waterway and, needless to say, such a move would propel oil prices well into triple figures,” Stephen Brennock, oil analyst at PVM Oil Associates, said in a research note.

“A blockade of this transport route would thus have dramatic consequences for global oil supply and an impact on prices that is almost impossible to put into figures,” Commerzbank wrote in a note.

Iran has threatened this before and the recent statements are likely a bit of bluster. Such a drastic move would not only provoke a response, likely from the U.S. Navy, but it would also be self-defeating since much of Iran’s trade also goes through the Strait. “The country that would suffer the most from the Strait of Hormuz being cut off would be Iran. It’s a muted threat. Because it’s like ‘I’m going to threaten my trade if you don’t allow my trade,’” Shaffer said. By Nick Cunningham, Oilprice.com

President Trump said Saudi Arabia would increase oil production by 2 million barrels per day. Here’s why they won’t. read… Saudi Arabia Won’t Bring 2 Million Bpd Online 
 

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  27 comments for “How Bad Is Iran’s Oil Situation?

  1. Paulo
    Jul 9, 2018 at 9:19 am

    Okay, there’s only so much oil in the World, and the world is pumping flat out. So, someone says, “Don’t anyone buy 5% of that oil or else”. Obviously, other countries will buy Iranian oil because they have no choice.

    And if an embargo appears to be bringing Iran’s economy down, obviously they are going to get some licks in and stop a few tankers transiting the Straits. Would you roll over and go quietly? Seriously, would you?

    And this is all to denigrate a nuke arms agreement that Obama signed on to, but one that would be considered fantastic if the other country was North Korea and the time was 2018.

    Beware of unintended consequences and ignorant world leaders. (No names mentioned). :-)

  2. Richard Carlson
    Jul 9, 2018 at 10:36 am

    I was always under the impression that sanctions of this kind were illegal under international law. Is this another instance of “It’s not illegal if the president does it”?

  3. Ambrose Bierce
    Jul 9, 2018 at 10:51 am

    I always thought the US would block the straights of Hormuz, to isolate Iran. Good thing I am not in charge of foreign policy.

    • Tim
      Jul 9, 2018 at 3:12 pm

      Uh, well, maybe using institutional power (coercion) to prevent sales, is a form of a synthetic blocking of Hormuz. With the advantage of being selectively permeable/porous.

    • Álvaro
      Jul 9, 2018 at 4:13 pm

      > US would block the straights of Hormuz

      That would cause an economic apocalypse and would probably start WWIII.

  4. Kent
    Jul 9, 2018 at 11:17 am

    How much oil does China import? Can they absorb the entire Iranian production?

    • G46
      Jul 9, 2018 at 11:48 am

      China imports more than 8M barrels a day.

  5. Justme
    Jul 9, 2018 at 12:18 pm

    It is the standard US playbook: Economic warfare, using the the fact that all dollar-based trade eventually must be cleared or netted out through each banks reserves as held at the NY Federal Reserve Bank. That is what dollar hegemony is all about, being able to terrorize other nations by forbidding banks to trade in dollar with them, and enforcing the ban by punishing or excluding banks that break the ban from clearing / netting out their dollar transactions at the NY Fed. If a bank is excluded from that function, it will lose all customers that need to settle trades in USD, which is pretty much everyone, so the banks will obey.

    It is an act of war for all practical purposes, every bit as much as a sea blockade is an act of war. When I first read about Iran threatening to block the strait of Hormuz years ago, I did not understand WHY they were doing it. It was spun in the US media as Iran being warlike and aggressive “because Ayatollah or “because Islam”. In reality it was just a rational response to the US declaring economic blockade on Iran.

  6. Begbie
    Jul 9, 2018 at 12:50 pm

    USA! USA! USA!

    Whats OURs is OURs and what YOURs is OURS!

    We OWN the WORLD!

  7. sierra7
    Jul 9, 2018 at 1:52 pm

    The more things change the more they remain the same. It’s outrageous that my own country can unilaterally (and arm twisting of it’s “allies”) levy sanctions in this case Iran who has repeatedly and according to official sources has tried to comply with the IAEA protocols for the prevention of manufacturing of nuclear weapons.
    From the article: ” One other thing to keep an eye on are the protests underway in Iran.”
    Protests, Pro? or Con? or against or for WHAT????? Poorly written.
    You don’t have to be a genius to ascertain that Israel is behind this incredibly bad foreign policy.
    My experience is that when a bully continues to “bully”, the victim eventually strikes back and “floors” the bully.
    Beware the new ideas of “cyber-war” that have been growing the past decade.
    The US history vs/vs Iran is so bad over the past 70 years it boggles the mind……You beat the dog and the dog will eventually bite back.
    Iran could also just sink multiple tankers at the entrance to the Straits and that will be the ball game for a long time.
    Stupid, stupid, stupid!

  8. ewmayer
    Jul 9, 2018 at 4:47 pm

    The ever-eager-to-play-US-foreign-policy-poodle EU strikes me as especially feckless in its ‘response’ to the illegal US sanctions. Even if the EU’s leading member nations have no effective way – and this is far from clear to me – to force private EU firms to continue buying Iranian oil, they could make a point of buying such oil for refinement and use by their militaries. In fact, insofar as the militaries likely buy their refined oil products from private firms, there is the needed leverage – ‘continue importing Iranian oil or we will cut you off from government contracts’.

  9. Alex
    Jul 9, 2018 at 4:55 pm

    What justification does the US have for blocking oil exported from an Iranian port through international waters? Just as the US blockaded Japan during WW2 before it officially entered the war what will this current aggressive action result in?

    • Mean Chicken
      Jul 9, 2018 at 5:33 pm

      In mt understanding, this subject relates to Iran continuing to fund terrorism and carrying forward nuclear ambitions?

      • Álvaro
        Jul 10, 2018 at 12:40 am

        Oh, so it relates to completely made up lies, I see now.

        • d
          Jul 10, 2018 at 4:40 am

          Those who support the Islamofascist that run tehran, deserve everything that will befall them, should the Islamofascist attain their Nuclear objectives.

          irans nuclear weapons program is a harsh reality, not a lie.

        • Professor Chaos
          Jul 10, 2018 at 8:35 am

          And you have proof of lies? Please share.

    • Jul 10, 2018 at 11:06 am

      A naval blockade is an Act of War. If the US Navy were to do that Iran would be within its rights to sink any ships in the US Navy in theatre.

      How bout them apples!

      Hello $500 oil!!

      My prediction is $500 a barrel oil would cause some economic problems here and there.

  10. raxadian
    Jul 9, 2018 at 6:51 pm

    What no one is saying about this is that in a few years, with Wind Power and Solar power becominf the cheapests energy sources around, Oil price is gonna take a hit.

    Of course transport is gonna keep using oil for a long while, but whatever.

    • Mean Chicken
      Jul 9, 2018 at 7:15 pm

      Why not complain about the Pentagon budget, that’s where a huge chunk of taxpayer wealth goes that could be diverted towards something you’d prefer?

    • Álvaro
      Jul 10, 2018 at 12:41 am

      > in a few years

      I’ve been reading this for a few years now.

    • Nicko2
      Jul 10, 2018 at 6:30 am

      Iran has significant Natural Gas reserves….so that will maintain value for probably a century.

  11. Mean Chicken
    Jul 9, 2018 at 7:23 pm

    Iran has threatened to settle the ME peace issues using nukes if they can get them, so we should send them a complementary set, no?

  12. TruthHurts
    Jul 10, 2018 at 10:30 am

    When you know your economy is insolvent, you start a war; war not only distracts the population from their economic realities, but also rallies the economy. They count on Iran being forced to respond.

    The problem with this strategy is that fortunates of war are unpredictable in this case.

  13. Kiers
    Jul 11, 2018 at 10:54 am

    Any word if Wilbur Ross, Icahn, and other cabinet members et al, have positions in oil futures whilst all this goes down?

  14. WSKJ
    Jul 12, 2018 at 11:39 pm

    Mr. Cunningham, your objective coverage of this subject is appreciated.

    I recall, in the 90s, being a little surprised and disappointed, that the U.S. did not accept a proposal for the Iranian wrestling team to visit the U.S. and take part in some exhibition matches (Clinton was president). Seemed like a good way to work on building bridges.

    We did let the Russian ballet visit during the Cold War. Cultural exchanges. But perhaps we were afraid that the Iranian wrestlers would beat our guys ? A little more on the line than being grateful to simply watch and praise probably the world’s greatest ballet company.

    Obama appeared shady during his Iran foreign policy initiatives, and he appeared set on doing something spectacular, rather than something solid, of lasting benefit. Not good to look shady or weak, or egotistical, in diplomacy.

    Iran has, as recognized “supreme leader”, one ayatollah after another, who gives speeches which declare continuing determination to destroy the state of Israel. Not good to look bent on the destruction of one of your neighbors.

    The people of Iran, insofar as they are ever visible to us in the west , mostly seem to be like us- wanting some kind of safety and prosperity, for themselves and their families. …and in both cases, we are led by courtiers, “supreme leaders”, politicians, those who have seized power, and those who have been elected to it . For the most part, they are not up to the job. If I named Clinton and Obama above, it is only because they came to mind as I recall news of Iran in recent decades. We have not done well. We must do better.

    Again, Mr. Cunningham, thx for the objective post

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