Iranians sit tight as oil sales fall
With new US sanctions against buyers of Iran’s oil due to take effect November 4, Tehran’s sales have fallen more than analysts expected. However, they say the rising price of oil could mitigate damage to the Iranian economy.
When US President Donald Trump announced in May a plan to penalise Iran’s customers, analysts anticipated a drop of 300,000-700,000 barrels a day (bpd) from sales of 2.6 million bpd. Most now expect a fall of up to 1.5 million bpd.
“We’re looking at oil exports averaging 1.2 million bpd in 2019 and remaining at around that level in 2020,” said Nicholas Fitzroy, risk briefing director and Middle East analyst at the Economist Intelligence Unit. “The oil market is close to balance, so the further tightening of the market will make it more volatile and price sensitive, as changes in market dynamics have an increasing impact going forward. This means that political risk, particularly in the Middle East, will have a greater effect on prices than in recent years.”
Amrita Sen, chief oil analyst at Energy Aspects, estimated a fall to 1 million-1.2 million bpd by the end of 2018 could push global oil prices to more than $90 per barrel. The OPEC meeting September 23 failed to act on Trump’s tweet that: “The OPEC monopoly must get prices down now!”
OPEC refused to increase production. Saudi Arabia, the United Arab Emirates and Russia insisted they had spare capacity to meet any shortfall from Iran but ruled out acting prematurely.
The effect was an immediate 2% jump in prices, with Brent crude reaching its highest since November 2014 of just less than $81 per barrel. Oil traders are discussing the possible return of the $100 barrel of oil. Bank of America is looking at $80 per barrel next year but is stressing that any upsets — lack of capacity, outages in key producers, conflict — could take it higher.
Commodity traders Trafigura and Mercuria suggested Brent could reach $90 per barrel by Christmas and pass $100 in early 2019. HSBC warned of the risk of a spike to $100 per barrel as Iran’s exports fall: “We expect strong compliance from key US allies, with the greatest uncertainty probably concerning the response from China, India and Turkey among others.”
With Trump edging into trade war with China and taunting Turkish President Recep Tayyip Erdogan, analysts are surveying politics as much as calculating supply and demand. Iranian military manoeuvres near the Strait of Hormuz were overshadowed by militants killing 29 people at a military parade in Ahvaz on September 22 but nonetheless highlighted the importance of straits through which pass one-third of all oil transported by sea.
The Iranians are sitting tight. Leading officials, including Oil Minister Bijan Namdar Zageneh, do not deny the damage caused by US sanctions but stress that Washington will fail in its objective of reducing Tehran’s oil exports to zero.
Oil revenue made up 33.5% of Iranian government revenue in 2016-17, the International Monetary Fund said, with the 2018-19 budget based on a price of $55 a barrel. At $80 a barrel, a fall of 1.5 million in oil sales would cost Iran $43.8 billion a year gross but an additional $10 a barrel, even on lower sales of 1.2 million bpd, would add $4.4 billion a year.
With long experience of sanctions going back to the 1980-88 war with Iraq, Iran can also expand “unofficial” sales. Some Iranian vessels have recently become “ghost tankers” by turning off the system allowing traders to track their movement. Authorities have given permission for oil to be sold through the private sector — thereby easing surreptitious movements not just by sea but through Iraq, Afghanistan and Pakistan.
Another option to mitigate the effect of US sanctions is avoiding the dollar. India, which is seeking a waiver from Washington to continue imports at a lower level than present, is set to pay for Iranian oil in rupees rather than euros.
South Korea has cut back entirely. Zanganeh admitted that Seoul has bought no Iranian oil for three months. India imported $1.08 billion worth of oil in August, nearly double the $520 million imported in the same month last year, with its culminative imports for April-August up to $6.82 billion from $3.27 billion.
China is also resisting Trump, with average imports of 505,000 bpd in August. Beijing recently introduced oil futures priced in yuan and wants its currency used in international trading, including oil. Its refiners are generally small and, like Chinese banks, have little exposure to the US market.
Europe has established a special purpose vehicle to facilitate trade with Iran bypassing the dollar, hoping to keep Tehran within the 2015 deal limiting its nuclear programme but this will persuade few European companies. The important questions are: How much oil China, India and Turkey buy and how much they pay for it.