Iran oil sanctions may not be a game-changer after all

The latest move in the US-Iran tussle marks the collision of rhetoric with oil market reality. Sanctions on oil exports came fully into force on Sunday, but the Trump administration had to concede some sales would continue. In response, Brent fell below $73 per barrel on Friday, having gone above $86 in early October.

Ahead of the crucial US mid-term elections on Tuesday, the US has tacitly acknowledged it risked tightening the market too fast. Eight countries will be granted waivers to continue importing lower quantities of Iranian crude, having been adjudged to have done enough in reducing purchases, but two of them are expected to get to zero within weeks.

The list includes, as expected, China and India and probably Turkey. US partners South Korea, Japan and likely Taiwan will also be spared. The EU as a whole has not received a waiver. If not individual European countries, Iraq and the UAE could be the other two, though this will only be confirmed on Monday. Granting waivers to China, India and Turkey represents something of a success for the US, since it would mean they have implicitly accepted the application of sanctions whose legitimacy they reject.

At the moment, market attention is mostly on the short term – how many barrels have been lost up to November, or will disappear over the next few months? Oddly, immediate Iranian exports are likely to go up, because the three East Asian allies had cut their purchases to zero ahead of the deadline. Chinese state oil giants Sinopec and CNPC had also halted November imports because of concerns over sanctions and probably also a negotiating gambit to squeeze discounts from Iran.

Exports of 2.5 million barrels per day in the first half of this year have dropped to around 1.5 million bpd in October, although some 0.3 million bpd may have been delivered to Asian storage, from where it will ultimately be sold. But the next round of evaluation and pressure will no doubt aim to bring down purchases by all eight countries.

If it can’t cut exports to zero, the US wants at least to lock up payments to Iran in escrow, achieving much of the financial impact of sanctions without taking too much oil off the market and driving up prices.

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US to grant waivers to eight buyers of Iranian crude

Iran's losing game to sell oil may not be the only pain ahead

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Some next steps in the campaign are clear. The US will attempt to increase oil supplies elsewhere, both its own crude, as well as medium-gravity crudes that are a better replacement for lost Iranian barrels. After the effective end of the “OPEC+” restrictions, Saudi Arabia and Russia have sharply raised production. And in the year to come, capacity in Iraq and Abu Dhabi will expand.

In the event of a price spike, oil could be released from the US’s Strategic Petroleum Reserve, but that is only a short-term fix, draining stocks in the event of a real emergency, and likely to pile up in the US without doing much to lower pump prices.

The cat-and-mouse game, already underway, involves Iran disguising the destinations of its tankers and its buyers, while the US seeks to identify them, with satellite tracking playing a big role.

While sanctions on Iran may remain highly effective for a year or so, it is highly unlikely they will continue to do so in their current form. If Iran were to resume enriching uranium without the Joint Comprehensive Plan of Action’s restrictions and the EU were to respond by supporting American sanctions, the embargo would be strengthened.

But if matters continue on the current track, those who wish to continue trading with Iran can be deterred only by beating them with the big stick of the US financial system. Given time, more mechanisms will be developed outside US purview, as Russia, China and the EU all have reasons to maintain their financial sovereignty. China and India, which took respectively 26 percent and 23 percent of Iranian oil exports in the first half of this year, are the key.

The 1990s “oil for food” scheme in Iraq was bedevilled by corruption and political machinations, while immiserating ordinary Iraqis. Similarly, the prize of $200 million per day or so of Iranian oil exports is too tempting to ignore for any ingenious trader or go-between, or independent refiner without US exposure.

Iran is not likely to come back to the negotiating table: it would not be talking from a position of strength, unlike Kim Jong-Un following North Korea’s nuclear tests. Its own domestic politics make it almost impossible to parlay with an adversary that has already shown it is not bound by agreements. Iran also feels it is winning in the multiple regional conflicts. Even a Democrat in the White House in 2020 will not alter these dynamics.

But the Tehran regime has survived worse economic times, especially when imposed by outside forces. It is not likely to fall apart; instead, as with Saddam Hussein’s Iraq, its grip on society will tighten as the middle class is eviscerated. Having exhausted attempts at containment and collapse, will Washington then move to collision?

Robin M. Mills is CEO of Qamar Energy, and author of The Myth of the Oil Crisis