Crude oil prices on markets in New York and London dropped more than $1/bbl May 8 after US President Donald Trump announced the US was withdrawing from a 2015 international agreement that lifted sanctions against Iran.
New economic sanctions against Iran could reduce world oil supply. Oil prices rebounded in early May 9 trading.
Trump had repeatedly criticized the Joint Comprehensive Plan of Action (JCPOA), which still has the support of French President Emmanuel Macron, German Chancellor Angela Merkel, UK Prime Minister Theresa May, and the European Union.
The EU notes Iran has complied with the terms of JCPOA. Iranian President Rouhani has said Iran remains committed to the agreement.
During previous sanctions, about 1 million b/d of Iranian oil was taken off the world market. Commerzbank analysts noted about 500,000 b/d of that stemmed from a complete EU import ban.
“This is unlikely to happen this time around as the US has revoked the deal unilaterally and against the will of most other countries,” Commerzbank said in a research note.
The EU already has said it will not follow the US on imposing sanctions against Iran.
Sara Vakhshouri, president of SVB Energy International, said US sanctions will not be as effective as were sanctions imposed by an international alliance from 2012-16.
“In 2012, EU started the oil import bank and sanctions on tanker insurance,” Vakhshouri said. “This time, EU will try to encourage Iran to maintain its compliance with JCPOA.”
She noted that from the time new US sanctions are implemented, it will take up to 180 days before world oil markets experience a result on world oil supply. Refiners will have about 180 days to report lower imports from Iran, Vakhshouri said.
“Based on our field studies, we estimate that Iran has the technical potential to increase its oil production capacity about 120,000-180,000 b/d by mid-2019 if there is not limitation on its exports,” which could force reduced Iranian production, she said.
Barclays analysts said US withdrawal from JCPOA will test the effectiveness of US secondary sanctions.
“We think the UK, France, the EU (led by Germany), China, and Russia…may also risk US sanctions for engaging with Iran,” Barclays said. “Japan also is seeking a waiver to exempt it from the requirements associated with “significantly reducing” its imports of Iranian oil.
Ole Hansen, Saxo Bank head of commodity strategy, said a sharp rise in crude oil prices due to any Iranian supply disruption could raise the price of retail US gasoline.
“Seasonal higher prices are expected during the coming months when the annual summer driving season boosts demand,” Hansen said in a research note. “A sanctions-related spike in oil prices could therefore add further pressure on US motorists.”
Meanwhile, international investors have waited to finalize deals on upstream projects in Iran pending clarification on US foreign policy.
JBC Energy analysts said, “The difficult question is how willing banks and insurance companies around the world are to risk US sanctions and losing access to the US financial system.”
Energy prices
The June light, sweet crude contract on the NYMEX fell $1.69 on May 8 to settle at $69.06/bbl. The July price was down $1.66 to $68.97/bbl.
The NYMEX natural gas price for June dropped less than 1¢ to settle at $2.73/MMbtu. The Henry Hub cash gas price was $2.72/MMbtu on May 8, up 1¢.
Ultralow-sulfur diesel for June declined 2.7¢ to settle at a rounded $2.16/gal. The NYMEX reformulated gasoline blendstock for June fell 2¢ to a rounded $2.11/gal.
Brent crude oil for July dropped $1.32 to settle at $74.85/bbl on London’s International Commodity Exchange. The August contract was down $1.26 to $74.57/bbl. The gas oil contract for May declined $15.25 to $650.25/tonne.
The Organization of Petroleum Exporting Countries’ basket of crudes averaged $72.12/bbl on May 8, down 33¢.
Contact Paula Dittrick at [email protected].
