Weekly Energy Recap: Strategy Behind The Iran Sanctions

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Includes: BNO, DBO, DNO, DTO, DWT, OIL, OILD, OILK, OILU, OILX, OLEM, OLO, SCO, SZO, UCO, USAI, USL, USO, USOD, USOI, USOU, UWT, WTID, WTIU
by: Faisal Mrza

Summary

The commitment of Saudi Arabia and Russia to offset any shortages have eased oil prices.

It is not clear yet if Iranian condensate will be included in this latest round of sanctions.

China might play its cards, inviting the US to de-escalate the trade dispute if China agrees to buy US crude in place of Iranian barrels.

It still unknown if the sanctions will include Iran’s “swap” arrangements with neighboring countries.

Crude oil prices continued their downward momentum with Brent crude falling to a nearly three-month-low at $72.83 per barrel. WTI also fell to $63.14 per barrel.

The commitment of Saudi Arabia and Russia to offset any shortages after the imposition of sanctions on Iran have eased oil price increases. Noticeably, Saudi Arabia increased its production to 10.7 million barrels per day (bpd) in October and is capable of increasing output further if needed. Russia produced at a post-Soviet-era peak of 11.36 million bpd in September. This news has comforted the market with the knowledge that any supply shortages from Iran will be effectively met.

The U.S. economic sanctions on Iran will come into force soon. These sanctions were supposed to take Iranian oil exports to zero amid the “highest level of economic sanctions” imposed. However, the U.S. granted waivers to Iran’s top buyers, so that Iran will still be able to legally export at least one million bpd.

Even prior to the sanctions, Iran’s crude oil exports went down from 2.2 million bpd to 1.5 million bpd, as most of Iran’s customers have found other suppliers. Despite the U.S. waivers, many nations will continue to look for other options to purchase the crude oil they need, as U.S. waivers could be withdrawn with little warning.

It is not clear yet if the Iranian condensate will be included in this latest round of sanctions. It was not included during the 2012 sanctions because the Obama administration did not consider condensates to be crude oil. Much of Iranian condensate is from natural gas processing plants. There has been no Trump administration policy statement on whether Iranian condensates will be treated the same way as crude oil.

Any crude oil Iran can sell will be some relief for the country as it is running out of storage. Early last month, Iran was forced to move two million barrels of crude into a bonded storage tank at the port of Dalian in northeast China. It used a similar tactic during previous U.S. sanctions. Such a ploy is necessary so that Iran can maintain enough storage for condensate from its natural gas fields. Otherwise, they would be forced to shutter natural gas production. That would cause severe unrest among its population since natural gas is used for about 70 percent of Iranian domestic energy consumption, including home heating.

China is the largest importer of Iranian crude. China used to be the largest importer of U.S. shale oil until the outbreak of the U.S.-China trade dispute. Now is the time for China to play its cards, inviting the US to de-escalate the trade dispute if China agrees to buy U.S. crude in place of Iranian barrels. Considering that China’s trade surplus with the U.S. has hit record highs, this could be a win-win situation. The only question is whether the U.S. oil export infrastructure can keep up with the volumes needed. U.S. oil exports have faced some challenges lately, dropping to 1.5 million bpd from a peak of two million bpd.

Another issue, which is also uncertain in regards to the U.S. sanctions, is the small amount of trade of Iranian crude oil which is done through small banks outside the U.S. financial system. Those banks helped Iran to export oil during 2012 sanctions. This is despite the fact that Iranian oil tankers will face huge challenges in securing insurance that is mandated by the refineries’ discharging ports.

Finally, it is unknown if the sanctions will include Iran’s “swap” arrangements with neighboring countries. Iran does oil-gas swaps with Caspian Sea nations. It also does oil swap deals with these countries, so that Tehran can supply northern areas with oil processed at the Tehran, Tabriz and Arak refineries without having to transport it all the way from wells in the south. In another swap deal Iraq sends oil from its northern Kirkuk fields to Iran by road to be refined in Iran.

In return, Iran sends the same amount of crude to Iraq’s southern ports for exports. These swaps are considered an outlet for Iranian crude oil and US sanctions on them could cause considerable disruption.

Previously Published by Arab News

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