Today, the first tranche of sanctions on Iran go into effect. Iran will struggle with the economic implications but is unlikely to concede to the extensive demands of the Trump Administration. In November, the sanctions will turn to crude oil, complicating U.S. relations with a host of countries who import Iranian crude. The drama, therefore, is not just between the U.S. and Iran, but also between the U.S. and Iranian crude importers. Look for intended and unintended linkages between waivers to the sanctions and other economic or diplomatic objectives of the Trump Administration.
Following a week during which President Trump met with most of the signatories to the JCPOA, there appears to have been no movement on a concerted approach to Iran that would replace the JCPOA. Moreover, despite somewhat contradictory reporting, the Trump Administration continues to indicate that waivers on sanctions would be limited at best. The loss of Iranian exports continues to look inevitable. This is consistent with the President’s urging of producers to increase output and the discussion of an SPR release.
The Trump administration is taking an even harder line on Iranian oil exports than the Obama administration did prior to the nuclear deal, resulting in what amounts to an extraordinarily high stakes game of chicken over the next several months. In the longer term, the U.S’s application of unilateral sanctions risks states and coalitions developing alternative methods to purchase crude oil outside of linkages to the U.S. banking system
Later this year, California regulators will vote whether to extend the state’s Low Carbon Fuel Standard(LCFS) from its current expiration in 2020 to 2030. If it passes, renewable diesel would be the biggest winner among biofuels. A shortage of renewable diesel in California would create a strong incentive for producers to build new capacity in the next decade, particularly in feedstock-rich Asia.
For a number of reasons, all eyes will be on Mariner East 2, which will increase the U.S.’s ability to export ethane and LPG to Europe, as it stumbles toward completion. For U.S.-Europe NGL trade, it comes as Europe’s steam crackers are consuming growing volumes of ethane and LPG. However, the development of Europe’s ethane imports continues to fall short of expectations. Despite the Mariner East expansion, it will be surprising if ethane shipments via Mariner East rise to much more than 80,000 b/d six to 12 months from now. On the other hand, the expanded terminal’s LPG capacity will re-route existing LPG exports and be fully utilized. The most critical and far-reaching market development associated with Mariner East 2, however, is the timing and ramp-up of increased LPG exports. As the Global LPG Balance Chapter describes, demand growth outside North America will hit a wall when a lack of new U.S. terminal capacity chokes foreign access to North America’s growing LPG supply.
Refined products consumption will return to growth of 180,000 b/d in the next year after shrinking by 40,000 b/d over the past 12 months. Gasoline demand will lead the way with growth of nearly 50,000 b/d, due partly to reconstruction activity in Iraq spurring oil demand. Gasoline imports will still decline regionally, however, with new refining capacity coming online in Saudi Arabia and Iran.
Iranian President Rouhani recently met with President Xi at the SCO Summit. This meeting comes shortly after the withdrawal of the U.S. from the JCPOA, and the threat of U.S. sanctions on companies doing business with Iran. It is tempting to assume that China will strengthen ties with Iran, expanding oil trade with the Islamic Republic. However, China’s interaction with Iran is likely to be more symbolic than substantive.
Europe has signaled that the rift with the U.S. over Iran is significant even if both sides would like to see change in Iranian behavior. It is unclear how this rift will play out with regard to sanctions on European companies doing business with Iran, especially those buying oil. Both sides are likely to take stands on sanctions in principle, but then negotiate a series of individual time or condition-based exemptions or waivers. This may limit any reduction in European oil imports, even without a Saudi guarantee to make up a shortfall.
As expected, President Trump withdrew the U.S. from the nuclear agreement and re-imposed sanctions on
Iran and companies that do business with Iran. This includes companies who buy crude oil from Iran. This
could reduce Iran’s crude exports by about 300,000 b/d by late this year – a significant volume, but not as
large as press reports have indicated.
If protesters, now or in the future, are looking to bring additional pressure onto the ruling elites and the security forces, they will have to either coopt some segment of both or target the sources of their power and revenue, including the oil sector. It seems a long fuse has been lit.
Over the last few days, Saudi Crown Prince, Mohammad bin Salman, has arrested or detained individuals
under the charge of corruption. Yet, these efforts are intended to consolidate his power before he becomes
King. Perhaps this consolidation is essential to the successful execution of his Vision 2030, but it does fly in
the face of projecting a transparent, increasingly liberal economy worthy of foreign investment.
King Salman is the last of the Sudairi Seven to rule Saudi Arabia before the next generation (grandsons of King Abdulaziz ibn Saud) takes power. If Crown Prince, Mohammad bin Salman, ascends the throne in the next one to two years, he will rule – absent medical issues or political upheaval – for decades. This will include the period when judgment will be rendered on his Vision 2030 for diversification of the Saudi economy. The oil market’s focus on the Saudi Aramco IPO and its perceived connection to Saudi oil policy should be seen within the context of larger issues related to internal stability.
On Thursday, President Trump will make a speech on Iran in which he is expected to not certify that Iran is in compliance with the Nuclear Deal, as required every 90 days. This will give the Congress 60 days to take up the issue of putting sanctions back in place. At this juncture, a return to the status quo ante “the Deal” is impossible given the positions of the other P5+1 countries. But, Congress may take other steps to turn up the heat on Iran.
The autonomous Kurdish region of Iraq voted for independence last week in a resounding – but non-binding – referendum. Baghdad has dismissed the vote. Turkey and Iran, with large Kurdish populations themselves, have threatened a blockade. Turkey’s threat to shut the Kirkuk-Ceyhan crude oil pipeline puts Kurdistan’s nearly 600,000 b/d of crude exports at risk. Ongoing tensions have already encouraged a temporary run-up in Brent prices, and will keep a small geopolitical premium on the price of crude.
Even as President Trump continues to oppose the Nuclear deal with Iran, we expect him to certify the Nuclear Accord on October 15th (i.e., keep it as is) while increasing pressure on Iran in other ways. But certification comes up every 90 days, so this will be an ongoing issue.