Oil market guesswork
Serious guessing must start soon in a market sensitive to guesswork. Ministers of the Organization of Petroleum Exporting Countries and cooperating nonmembers will meet on June 26 to decide whether to extend production restraint in effect since the start of 2017. And by May 4, US President Donald Trump will proclaim whether trade sanctions against oil, natural gas, and condensate from Iran will be reinstated for eight of the country’s customers granted partial waivers from the restrictions last November.
Trump can be expected to scold OPEC about limiting oil supply even as he threatens to limit supply himself by letting the waivers expire.
The first move
In this game of cat-and-mouse, Trump’s need to make the first move favors OPEC and its collaborators. It means the supply managers will be able to account for the status of waivers, and thus of Iranian exports, when they assess demand for their oil. Yet the president would not hesitate to let waivers lapse before the exporters’ meeting only to reinstate them afterward if he disliked the outcome. Caught off guard by his announcement of waivers before Iranian oil sanctions were to resume last November, the exporters this time will have contingent plans.
Trump’s baiting of OPEC—and, by association, Russia, the most important non-OPEC production-cutter—tends to divert attention from effects of the mercurial sanctions on the oil market and in Iran. They’re substantial. A thorough review appeared last month in commentary by David Ramin Jalilvand, a research associate at the Oxford Institute for Energy Studies, London.
Iranian exports, Jalilvand reports, fell to 1 million b/d last November from an average of 2.5 million b/d in 2017 as importers anticipating the sanctions found other suppliers. They partly recovered to 1.5 million b/d in February. S&P Global Platts reported on Apr. 9 that Iranian crude and condensate shipments in March rose to 1.7 million b/d.
Jalilvand notes that countries with waivers, which limit imports of Iranian oil to sharply below presanction levels, vary in their use of them. By February, he says, deliveries of Iranian oil to European Union countries had ceased. Iran’s Asian customers continue to buy oil from Iran—but reluctantly, in many cases. Countries close to Iran, especially Turkey and Iraq, are bolder about maintaining oil trade with the Islamic Republic. Meanwhile, international oil companies have largely abandoned Iranian oil and gas projects.
These commercial developments conflict with efforts by the European Union to circumvent the sanctions, which were revived by Trump’s May 2018 withdrawal from the Joint Comprehensive Plan of Action on Iran’s nuclear program. The EU’s “blocking statute,” which asked companies not to comply with US sanctions, has had no economic effect, Jalilvand writes. And the analyst has little hope for an EU initiative last January to revive Euro-Iranian trade through a clearinghouse mechanism called “instrument in support of trade exchanges.” The mechanism covers only humanitarian items, doesn’t help Iran repatriate oil revenue, and doesn’t eliminate the risks to companies of trading with Iran.
In Iran, meanwhile, oil production has fallen faster than it did after the first imposition of international sanctions in 2012. From an average of 3.813 million b/d in 2017, Iranian output fell to 3.553 million b/d last year and to 2.743 million b/d last February, Jalilvand reports, citing OPEC data from secondary sources. The International Monetary Fund expects the Iranian economy to contract for the second straight year in 2019. The state budget has suffered, inflation is rising, and political pressures have forced into retreat factions inclined to reengage with the West. Iran also finds itself unable to join regional competitors, such as Saudi Arabia and the United Arab Emirates, in anticipating long-term oil-market changes with investments in refining and petrochemicals.
A shared problem
With the US president, Iran clearly has unique problems.
With other participants in an oil market from which it’s largely excluded, however, it shares a problem: a US president quick to use oil as a geopolitical tool.