Supply-side Shock Ahead in November?


The US has just rebuffed high-level pleas from the European Union to grant exemptions to European companies operating in and with Iran, underlining America's hardline stance in implementing its renewed sanctions on Iran. The goal is, according to Treasury Secretary Steven Mnuchin, is to reduce Iranian oil exports ‘down to zero' to ‘pressure Iran into changing its threatening behaviour.'

In May, Iranian crude and condensate exports totalled 2.7 mmb/d. If the US unwaveringly continues on its stance, that will be a major shock to the market. All across the world, crude buyers are adjusting their habits. Most major European refiners, along with South Korea and Japan, have drastically reduced their purchases. Loopholes had allowed China and India to continue trading with Iran during the Obama-era sanctions, but America's hardline stance this time appears to be dissuading them – US crude exports to India rose to an all-time high in June as it moves to replace supplies from Iran and Venezuela. Small waivers were allowed under Obama's sanctions, which was coordinated with the EU, but this new unilateral US move appears to be far, far stricter. At risk is not just global crude oil flows, but billions in investment – Total will now be forced to pull out of the South Pars project, having already spent some US$90 million out of a projected US$2 billion investment. This would leave the South Pars project in the hands of China's CNPC, but even that is uncertain, given the wide-ranging impact of the sanctions. China and the US are spoiling for a fight, having ramped up trade moves against each other and if China chooses to ignore the sanctions, things could get quite messy. However just recently, Iran announced that Russia is able and willing to get into the ring with an investment close to US$50 billion. President Putin himself affirming this plan with deals of at least US$15 billion being put on offer for exploration, production as well as refining.

Crude prices have been rallying over the last two months, as traders fear the supply-side shock that could arrest the oil's demand recovery. Quixotically, the Trump administration has balked against this self-inflicted higher level of prices – road gasoline prices in the US are at their highest levels since 2014, making Republicans more vulnerable to dissatisfaction in a crucial mid-term election year. Add to that the outage of the SynCrude facility in Alberta bumping WTI prices up significantly, pulling American fuel prices up to their lowest differential with Brent since late last year. The US is mulling tapping its emergency crude supply to mitigate rising pump prices, but Trump has gone on the offensive instead, accusing OPEC of colluding to keep prices high. But whatever good that OPEC's deal to raise production levels at its June 22 meeting in Vienna is being neutered by America's decision to allow Iran no space. Saudi Arabia has said it has spare capacity of some 2 mmb/d, but is reluctant to use all of that. And even if it did, it would not be able to make up for the complete loss of Iranian volumes.

So prices must rise. Morgan Stanley is predicting Brent prices of US$85/b in the second half of 2018. Goldman Sachs thinks prices will definitely rise above US$80/b. And the Bank of America is warning that a complete cut-off of Iranian oil could see prices jumping to US$120/b. That will be a political disaster for the Trump administration, as it battles to keep its majority in both US Houses of Congress. The solution to this is rather simple. Drop, or at the very least soften, its stance on Iranian sanctions. It seems logical, but logic does not always dictate geopolitical decisions.

Countdown to the US – Iran Sanctions 

  • The Deadline: November 4, 2018
  • The Goal: Reduce Iranian crude exports to zero
  • Current Export Volume: +/- 2.7 mmb/d of crude exports
  • Major Iranian Crude Buyers: Asia (65%), Europe (35%)
  • Iranian Crude Production: 3.8 mmb/d (May 2018)
  • Crude Oil Proved Reserves: 158 Billion Barrels (2017)
  • Proved Reserves of Natural Gas: 1, 283 Trillion Cubic Feet (2017)

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