The Trump government has finally had to face what many already knew: it will not be able to reduce Iran's oil exports to zero.
The United States will grant derogations to eight countries so that they can continue to import a certain amount of oil from Iran, provided they have scaled back their purchases in the coming months. The full list of countries will be released on Monday, but certainly also China, India, South Korea and Japan, which are four of Iran's biggest buyers.
"The exemptions reported by the US for up to eight countries to continue buying Iranian oil show that they are reducing volumes, at least that the Trump government has set a short-term goal of reducing Iranian exports to zero, "said Peter Kiernan, senior energy analyst of Economist Intelligence, in a statement.
Convincing countries to zero imports from Iran has always been difficult. On the one hand, it would be technically difficult, even if the Trump administration had a free hand. Iran continues to reduce its crude oil prices, offers charges for bartering, uses currencies other than the US dollar, and otherwise sends oil with various insidious means. Iran has always been able to maintain a certain export level.
More importantly, the oil market is simply too short to zero Iranian supply. Despite the recent slump in oil prices – dropped more than 15 percent last month – the market is still tense. The US and OPEC are rapidly expanding their supply, but it is unclear whether this will be a match. In the USA, production growth could slow down in 2019, and in the case of OPEC, additional production is at the expense of spare capacity.
The room for the White House is still pretty thin. "Although there are concerns that oil demand may weaken in 2019, there is concern that an abrupt interruption of Iran's supply would cause prices to rise and force oil-consuming economies to buy oil elsewhere," said Peter Kiernan. senior energy analyst at Economist Intelligence, said in a statement. "Saudi Arabia is able to partially compensate for significant Iranian supply losses, but not fully, making the market extremely vulnerable to a supply disruption from another source. As a result, the Trump administration had to be flexible to a degree, especially as larger oil buyers such as India and China were unwilling to stop Iran's purchases immediately. " Related topics: The cheapest natural gas market in the world could face a shortage
Wood Mackenzie expects Iran to lose another 800,000 bpd of exports compared to September after the sanctions take effect, and reduce total exports to 1 million barrels a day. "We believe the supply from other countries is just so great that there will be so much to do over the next few months to meet demand in the winter and avert a rise in prices," said Ann-Louise Hittle, VP Oil Markets at Wood Mackenzie in a comment. "Brent should hold around $ 78 a barrel, but it's a very fine line. Two years ago OPEC reserve capacity was sufficient 4 to 5 million barrels / day. Within 30 days, only 0.7 million barrels / day are currently available. That is, the market is prone to heavy demand in a cold winter or a new supply failure. "
If the Trump government had succeeded in zeroing Iran's oil exports, prices would have fallen much higher. However, this would have led to a political problem at home before the elections. That was a price the administration did not want to pay. However, as it became clear in recent weeks that Iran's oil exports will hold, oil prices fell.
Despite the concession, the Trump administration was confident and tried to express its determination to continue disrupting Iran's oil exports. "We are very confident that the measures taken will help us put maximum pressure on the Iranian regime," State Department Deputy Spokesman Robert Palladino said at a meeting Thursday.
Insofar as the Trump government succeeds in this effort, this is only possible as long as oil prices remain at a tolerable level. Otherwise, more waivers are required for a longer time.
By Nick Cunningham for Oilprice.com
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