US sanctions against Iran take effect, eight waivers granted

But their effect might be less than previously feared

Sanctions, Donald trump, Brent crude, Oil price, Waivers

As US sanctions take effect against Iranian oil, the world is waiting to see how the market will react; for months, analysts have speculated about a potential supply crunch. But with eight waivers granted to countries reportedly including Turkey, South Korea, Taiwan, India and China, fears have been tempered.

As a result, Brent crude dipped to $72.41 per barrel (as of writing), down from its four-year peak of $86 per barrel in early October. Some countries which had lowered (or eliminated) purchases of Iran's oil, like South Korea, or China's CNPC and Sinopec, would be able to resume imports, so in the short-term that may contribute to higher export numbers.

The terms of the waivers are still unclear, as it will set a volume limit and will reportedly place payments to Iran in escrow to apply more financial pressure on the country. While the US government wants to pressure Iran, it also needs to keep oil prices low.

“It will be difficult for Iran to maximise exports when virtually all trade in oil is cleared in US dollars, putting international oil companies, many national oil companies, traders and banks off limits," said Homayoun Falakshahi, a senior research analyst with Wood Mackenzie’s Middle East upstream team. "Crude exports contribute one-third of government revenues, so there’s a huge incentive for Iran to use every conceivable lever.

US President Donald Trump has been notably critical of OPEC and has pressured it to increase supply to offset cuts due to sanctions. Iran's oil exports reached its peak at 2.8mn bpd in April, and fell to 1.8mn bpd in September.

ADNOC announced yesterday that it plans to raise oil production capacity from its current 3mn bpd to 4mn bpd by the end of 2020, and Saudi Arabia has said the country has spare capacity of 1.3mn bpd. Negotiations betwen Kuwait and Saudi Arabia could further unlock 500,000 bpd of production in the Neutral Zone.

“We think there’s just enough growth in supply from elsewhere to muddle through the next few months, meet winter demand and avert a price spike," said Ann-Louise Hittle, vice president of macro oils for Wood Mackenzie. "Brent should hold around US$78 a barrel, but it’s a very fine line. OPEC spare capacity was an ample 4 million to 5 million barrels per day two years ago. There’s only 700,000 barrels per day of additional available within 30 days right now."

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Oil & Gas Middle East - January 2019

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