Among all possible outcomes of US withdrawal from the Iranian nuclear deal, diminished exports of crude by the Islamic Republic might be the least consequential for oil prices. Against counsel of European signatories and some of his own advisors, President Donald Trump on May 8 ended US participation in the Joint Comprehensive Plan of Action (JCPOA), the deal implemented in 2016 under which Iran agreed to suspend nuclear development in exchange for waivers of international sanctions against it.
Crude prices rose in anticipation of the move. But the lasting effects of diminished Iranian oil supply probably won’t be dramatic. Importers of Iranian crude will have at least 120 days to adjust. And they can skirt sanctions by demonstrating progress, ill-defined, toward reducing their reliance on Iranian crude.
Effect on supply
According to several analysts, reimposition of sanctions might remove 500,000 b/d from global trade. That’s less than a third of supply now held off the market by 12 members of the Organization of Petroleum Exporting Countries and 10 cooperating nonmembers. Saudi Arabia, which supports Trump’s move against Iran, has hinted it will keep oil flowing as needed. The United Arab Emirates has done so, too. Their assurances should damp prices—or more. If they did increase production, the historic production discipline that has held the supply agreement together more than a year might collapse. And if they didn’t raise output to offset losses from Iran, further price gains would strengthen the temptation on all parties to the agreement to cheat.
More-important variables for the oil market are harder to predict. They all relate to how Iran responds to the US move and what happens after that. Iranian leaders initially seemed inclined to try to keep JCPOA intact without the US, obviously hoping to capitalize on European irritation over Trump’s move. How the Europeans react therefore will be important. So will responses of Saudi Arabia and the another outspoken supporter of Iranian sanctions, Israel.
Both those countries are in open conflict with the Islamic Republic or its proxies. A Saudi-led coalition imposed a naval blockade of Yemen in 2015 and began military incursions to block Houthi rebel advances in the northern part of the country. With Iranian support, Houthi militants have launched more than 125 rockets at Saudi cities, so far to little effect. Israel last week intensified air strikes on Iranian positions in Syria after a rocket attack against the Golan Heights. Russia, which backs Iran in support of Syrian President Bashar al-Assad, has not responded but remains a source of extra pressure as it tries to gain influence in the region.
Like all hostilities, these might escalate, although all the antagonists seem to want to contain the danger. Other new forces of destabilization are emerging, though. In elections on May 6, Iranian proxy Hezbollah and affiliates won more than half the seats in Lebanon’s parliament. That development will trouble both Israel, with which Lebanon technically remains at war, and Saudi Arabia, which fumes over the strengthening extension of Iranian influence to the Mediterranean. Saudi officials were sure to have watched with unusual interest elections scheduled May 12, after this writing, in Iraq. There, former President Nouri al-Maliki was thought to have a chance of defeating the incumbent, Haider al-Abadi. Both candidates belong to the Shia Islamist Dawa party. But Al-Maliki has closer ties to Iran. A further strengthening of Iranian influence in Iraq as well as Lebanon would not be welcome news in Riyadh.
Standard worry
The standard worry when tensions rise around the Persian Gulf concerns an outbreak of regional war and consequent disruption to oil supply. As usual, however, different scenarios exist. Saudi Arabia is stronger militarily than ever before, to be sure. But it and its quiet ally, the UAE, can raise oil production in an emergency by a combined 2.5 million b/d.
That’s enough to crush oil prices—a threat Tehran and Moscow can’t ignore and no one else should forget.