Abu Dhabi, UAESunday 21 July 2019

Trump's price sensitivity at petrol pumps may hamper Iran clampdown

A complete drawdown of Iranian exports unlikely to happen until November when more US shale supply hits the market

President Trump, a big advocate for low oil prices, may find his Iran policy weaken over the summer if crude prices continue their rally. Bloomberg
President Trump, a big advocate for low oil prices, may find his Iran policy weaken over the summer if crude prices continue their rally. Bloomberg

Donald Trump's administration may find its decision to revoke all waivers to Iran’s longstanding oil clients unlikely to drive exports to zero, particularly when the US weighs price sensitivity of American consumers against policy.

"President Trump’s price sensitivity has been a strong driver in decisions regarding Iran over the past year and he’s been pretty clear about that. Generally, $65 Brent is the upper end of his tolerance level,” Randolph Bell, director, Global Energy Centre at Washington-based Atlantic Council told The National.

Further cuts to Iranian exports could be expected, he added, but “not at the same level” with "a significant amount of Iranian barrels on the market from under a million bpd - sort of a 20 per cent cut”.

US Secretary of State Mike Pompeo on Monday said all eight countries importing oil from Iran - China, India, Japan, South Korea, Taiwan, Turkey, Italy and Greece - won’t have their exemptions renewed from May 2. No grace period will be given to any of the importers as the Trump administration looks to squeeze Iran’s exports, which averaged 1.1 million bpd since sanctions began in November, to zero.

However, a complete drawdown on Iran’s exports cannot be set into motion until November, Mr Bell noted, when production in the US’ Permian shale belt is expected to go up and more supply will be hitting the market.

“The market is sort of aligned with that and it would be more of a sort of a gradual drawdown. This is surprising because they have put an effort to weaken Iran as a priority over the oil price,” he added.

Oil prices are poised to breach $75 per barrel following the decision to end waivers and set to climb up to $80 by the third quarter of this year. A policy rethink could occur, however, as President Trump - amid his re-election campaign - tries to appeal to a price-conscious domestic voter base during the US’ peak driving season.

Saudi Arabia and the UAE have pledged to fill the supply gap left by the loss of Iranian barrels, ahead of an Opec+ meeting set for June where members will consider how to proceed with their ongoing production curbs of around 1.2 million bpd.

"If he doesn’t see change in Opec come June and the prices stay high then he will complain about them but at some level, he will need to recognise that he made this decision. I can’t see the policy changing but one never knows,” noted Mr Bell.

There is also pressure from Iran’s biggest buyers, India and China, who were taken aback by the White House’s decision to revoke their waivers.

China, which imports approximately 585,400 bpd, has already spoken out against the US decision. Beijing’s foreign minister formally complained to the US on Tuesday saying the revocation of exemptions would “contribute to volatility in the Middle East and in the international energy market”.

With around 6 per cent of imports coming from Iran and Chinese firms engaged in exploration and production in the country's major oil fields such as Yadavaran and North Azadegan, China’s energy partnership with Iran is strategic.

During the last round of sanctions under the Obama administration, China had set up a bank to continue its imports, bypassing the US financial system.

Analysts such as Facts Global Energy’s Middle East managing director Iman Nasseri said that the Trump administration’s sanctions were more hardline than his predecessor's, going after Iranian crude rather than dollar transactions.

"I don't think we will see many buyers continuing trade with Iran in other currencies,” he said.

The London-based consultancy expects Iranian volumes of around 200,000 to 300,000 bpd to continue to be smuggled out via land through neighbouring Iraq, Pakistan or even Turkey.

India, which did not formally react to the US decision, is currently looking at alternatives to Iranian crude. The biggest impact on the South Asian country will be the increase in petrol prices, a sensitive issue as the world’s largest democracy goes to the polls.

"The issue with oil is not physical availability, but the ability to pay for it,” said Amit Bhandari, senior fellow, energy and environment at Mumbai-based think tank Gateway House.

"India [and China] can buy more oil from West Asia, or other suppliers such as Nigeria. The key issue is of price.”

Updated: April 24, 2019 03:25 PM

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