US Sanctions on Iran Could Unsettle the Oil Landscape

US Sanctions on Iran Could Unsettle the Oil Landscape

Oil Experts believe otherwise. Say sufficient world supplies could keep prices under check

Several months after the US President Donald Trump signed an executive memorandum to withdraw from the Iran nuclear deal, the recent economic sanctions on Iran’s oil exports along with nation’s aviation, shipping, and banking industries are expected to have quite notable implications on not just the world energy markets and the overall financial business landscape, but also on Iran’s Middle-Eastern geopolitics. But much above that, also lies the risk of jeopardizing the relationship young Iranians have with America. In the early week of November, the US administration reinstated its ‘multi-purpose’ sanctions in the hope that Tehran would accept an improved nuclear deal, restrict Tehran’s ballistic missiles program, and end hostility of some regional groups.

Apart from controlling Iran’s oils, banks, and ports, the economic sanctions has also threatened Iran of excluding it from the America’s financial systems if the nation trades to support the Iranian oil exports. Moreover, US’s the famous exit from Joint Comprehensive Plan of Action (JCPOA) in May 2018, is unlikely to return to normality in spite of a Democratic majority in the House of Representatives, Iran’s economy has felt the pressure, with revenue down by almost US$2 Billion and the Iranian Rial, down almost 75 percent since 2017, compared to the US dollar.

The economic sanctions—being termed hawkish by some strong political forces—are projected to translate into much adverse and aggressive Iranian behavior, the most prominent being oil exports and supplies.

Skewed Oil Supply Remains a Concern after US Sanctions on the Islamic Economy

As soon as the Trump administration withdrew from the Iran’s nuclear deal, oil market experts were quick to see the many implication this ruling would have on the global oil and gas market. Already facing the heat of the economic sanction, Iran’s oil exports have significantly fallen to 1.5 million barrels per day (bpd) from a daily average of 2.5 million bpd. This means that Iran the supply is much lesser—nearly 1 million bpd, than what the nation exported a few months back. As per Reuter’s latest report, oil is currently being traded at over UD$70 per barrel, after Saudi Arabia’s decision to cut their output by 0.5 million bpd in December was announced, which came after the Organization of the Petroleum Exporting Countries (OPEC+) meeting in Abu Dhabi. The Trump administration felt the pressure of Saudi Arabia’s new likely strategies to cut oil output that further translated into softened sanctions for China, India, South Korea, Japan, Taiwan, Greece, and Turkey. Earlier this week, the President of United States, through a tweet, warned OPEC against reducing oil production. In the tweet, the President also mentioned that the “oil prices must be lowered based on supply”. To keep the oil supplies flourishing, Trump’s last hope remains in Saudi Arabia and assuage further impact of its sanctions on Iran. However, Asian heavyweights like India, Japan, South Korea, and China being allowed to purchase Iranian crude oil is just a short-term fix (six-monthly basis), to ensure temporary trade flows between Iran and Asian nations.

Oil traders have definitely been calmed by the waiver, letting Iran export oil to European and Asian countries. However, in the prospects of tightening oil supplies, the eight waivered countries could seek supplier alternatives and replace Iranian crude. This scenario also resulted in more oil being pumped by producers. A result of which of oils barrels being replaced by producers from Saudi Arabia, US, and Russia. The America oil exports are expected to increases owing to the new pipelines and export terminals along the Gulf of Mexico and in Texas.

In the developed economies, oil experts anticipate further tightening of oil supplies during next summer, translating into higher oil prices. The aviation industry could also take a hit as a result of the rising aviation fuel prices, which often is offloaded on the air travelers. Experts also foresee significant increase in oil price, if Iran decides to block the important passage for Persian Gulf oil- the Strait of Hormuz. Furthermore, military or cyberattacks on Saudi Arabia and Israel and escalating military hostilities in Yemen, could block many crucial oil trade points.

The oil market’s future could also be defined by how well Iran evades these sanctions, considering the technological advancements like satellites that can be used to track oil tankers with turned-off Automatic Information System—removing them from the monitoring radar. Furthermore, the challenge also lies in receiving payments for the Iranian crude. Oil sales is likely to slow down if US deploys its SWIFT banking exchange system to penalize importers buying Iranian crude.

Sanctions to Remain Powerful Only When Other Powerful Allies are Onboard

The US economic sanctions are a powerful weapon—in some cases, the most powerful among all world superpowers. In the recent time, US’s aim to make use of the sanctions all alone, could work against it and also, to an unimaginable extent dilute its significance, if the Trump administration continues to go head with a this approach. The sanctions, if not pursued in coordination with other superpowers including EU, South Korea, and Japan, could have larger implications on the global international trade landscape, financial markets, and of course, currency trading.

The EU, for instance, is seeking to set up a special financial clearing system, in the form of Special Purpose Vehicle (SPV), for Iran and businesses. The immediate goal is of these SPVs is definitely to rescue Iran from the clutches of Washington, but in the years to come, these systems are also projected to prove beneficial for other sanctioned nations including China and Russia, and offer a level-playing field outside the America-ruled system. The setting up of these SPV, although seems much complicated considering the challenges to banks, governments, and global businesses, are a result of the single-handed use of sanction by Washington. However, the National Security Advisor of US, John Bolton recently said that the EU’s efforts evade sanctions on Iran “may be ineffective”.

 

About Sudip Saha 7 Articles
Sudip Saha is one of the leading tech consultants in APAC, having served at key positions in leading IT consulting firms. He has extensively written about the commercial viability and impact of next-generation technologies, most notably AI, IoT, and Big Data. Sudip’s forte lies in offering a nuanced analysis on the key developments in the tech landscape. A reputed thought-leader, his views have been published in leading publications, including CIO, ZD Net, Economic Times, and The Economist