As major OPEC producers increase output following their recent meeting, it looks as if they are headed towards Plan B, which entails rolling back not only their own over-compliance, but also that of others. With the Trump Administration now upping the ante on Iran by indicating a desire for full reduction in imports of Iranian crude (as compared to President Obama’s 20 percent), it is not clear which importers might cut back to zero. The OPEC producers with spare capacity will likely increase output by something close to 1.0 million b/d by the end of the year when the sanctions take effect
Two recent developments are currently exerting bullish pressure on oil prices. The outage at the Syncrude facility in Alberta has taken roughly 300,000 b/d of light synthetic crude off the market, diverting supplies in the U.S. Midwest. The latest reports indicate the upgrader will remain offline through July. Meanwhile, recent escalation in the U.S. administration’s stance on stopping exports of Iranian crude will likely keep oil prices elevated this summer. It is unclear how successful the Trump Administration will be in forcing importers to reduce Iranian imports to zero, but we now see a reduction in Iranian exports in the range of 1.0 million b/d as likely. Saudi Arabia, Kuwait, and the UAE will raise production to fill the gap. But uncertainty and dislocations surrounding the timing and pace of shifts in purchases should support crude prices.
US-European Trade Tensions Mount over Iranian Sanctions
After importing over 780,000 b/d of Iranian crude and condensate in 2017, Europe imported an average of 725,000 b/d in the first four months of this year. Turkey and Italy accounted for 190,000 and 170,000 b/d of this total, respectively, while Spain, Greece, and France each took in roughly 110,000 b/d. Due to the re-imposition of U.S. sanctions on Iran and the U.S.’ recent insistence on a halt to 100 percent of Iranian crude imports, European imports of Iranian crude could fall significantly. In the 2012-2015 period, when the E.U. actively participated in sanctions against Iran, all European countries with the exception of Turkey ceased importing crude from Iran entirely. However, now with the E.U. opposed to U.S. sanctions, we expect the E.U. to push hard for waivers and for European countries not to comply fully. Trans-Atlantic relationships will significantly worsen if the US targets European bankers personally to force SWIFT compliance. One potential source of leverage for Europe in securing waivers is the threat of import tariffs on U.S. shale crude. Over the first four months of this year, Europe imported nearly 390,000 b/d of U.S. crude, 270,000 b/d more than in the same period of 2017. We could also see more aggressive buying in advance of the November sanctions deadline.
Will China Resist?
China, India, Japan and South Korea imported 1.65 million b/d of Iran’s crude and condensate so far this year. Japan and South Korea, which together import around 500,000 b/d of crude and condensate from Iran, are more likely to follow U.S. rules based on their dependence on U.S. security relationships and compliance with U.S.-led international sanctions in the past. India, which imports some 500,000 b/d from Iran, has sent mixed signals this week from within the petroleum ministry. Private refiners Reliance and Nayara, mindful of their exposure to the U.S. financial system, have recently stopped their purchases of Iranian crude, while public companies are at least looking for options to source their crude elsewhere. India looks to be a wild-card, where imports could fall only slightly or more dramatically. China, however, may not go along. They may have drawn a line in the sand when they threatened tariffs on U.S. crude in response to U.S. tariffs. This non-compliance with U.S. sanctions could preserve some 650,000 b/d of the Iranian export market. What we know for sure is that this is a fluid situation. We will continue to follow and provide analysis as it relates to the supply and demand for oil.