The United States is ratcheting up its campaign against Iran with an ambitious new target: all of the Islamic republic's oil exports. On April 22, the White House announced that it would not renew sanctions waivers for Iran's oil customers after the current ones expire on May 2, adding that Saudi Arabia and the United Arab Emirates would help stabilize the market. The announcement sent the price of light sweet crude benchmark Brent spiked up 3 percent to $74 per barrel — its highest since October 2018.
In its 2019 Second-Quarter Forecast, Stratfor noted that a May deadline for Iranian oil purchase waivers would result in a steeper decline to the Islamic republic's oil exports. Washington has now announced that it will not provide any more waivers to Tehran's oil customers as part of its campaign of "maximum pressure" against the Middle Eastern country — something that will have consequences far and wide.
The previous round of waivers permitted eight of Iran's oil customers to continue importing around 1 million barrels per day (bpd) in total. Most of this allotment, however, went to just three countries: China, India and South Korea.
Turkey — another important buyer of Iranian oil — as well as China and India, had been expecting to receive new waivers, albeit for reduced volumes. But even if Iran's oil exports do not fall to zero, the country will export far less than the approximately 1.6 million bpd that it shipped overseas in March. Needless to say, the United States' tough line will cause ripples around the world. Below are the important issues to track.
What will the impact be? The White House's decision not to renew waivers will deal a huge blow to Iran's oil export industry, but the United States will struggle to cut off Tehran's oil exports altogether. Indeed, many tankers carrying Iranian crude routinely shut off transponders to complicate efforts to track the country's exports.
Which countries are key to watch? The three countries least likely to fully cut imports are China, India and Turkey. China bought 613,000 bpd of Iranian oil loaded in March, while India bought 258,000 bpd. Turkey, in turn, bought 97,000 bpd.
Will Washington follow through with its threats? Although the United States has said it will sanction Iran's oil customers if they fail to halt their purchases, it is not clear whether it will ultimately take such action. New Delhi, Beijing and Ankara each have different factors to weigh in terms deciding whether to maintain imports from Iran. Turkey, for instance, faces a much greater danger of incurring U.S. sanctions than the much larger China.
How quickly will Saudi Arabia and the United Arab Emirates respond? From a technical standpoint, the world's has enough spare oil capacity to compensate for the drop in Iranian exports. Saudi Arabia's production in March was below 9.8 million bpd — a full 1.3 million bpd lower than its output of 11.1 million bpd in November 2018. Saudi Arabia and the United Arab Emirates will boost exports, but they are targeting oil prices above $70, meaning they do not want to overcorrect as they did in November 2018 and inadvertently drive down prices.
Will this ignite another fight between Ankara and Washington? The decision puts Ankara in a bind, as Turkey and Iran agreed just last week to establish a special payment mechanism — which could include energy — to facilitate trade between the two. If Turkey proceeds with its deal, however, far-reaching U.S. sanctions could hurt its fragile financial system.
Although the United States has said it will sanction Iran's oil customers if they fail to halt their purchases, it is not clear if Washington will ultimately follow through on its threats.
How tight will the oil market become? If Saudi Arabia must step in significantly to replace Iranian output, concern will grow about the amount of spare production capacity in the global system. A lack of spare capacity could become an issue if production in Libya, where the country stands on the precipice of another prolonged conflict, and Venezuela falls considerably.
Will Russia bail on OPEC+? Russia has already been pushing for a change to the production cut agreement made between OPEC and other major oil producers (OPEC+), and the absence of Iran waivers could pose an existential threat to the oil production pact that will surface at the OPEC June meeting in Vienna. If the pact falls apart, OPEC+ might not be able to respond rapidly to any sudden drop in future oil prices.
What will Trump do if prices spike? U.S. President Donald Trump wants oil prices to remain relatively low. But if prices spike, Trump will likely lean on OPEC to increase production and could even release oil from the U.S. Strategic Petroleum Reserve in a bid to reduce prices.
What about Iraq energy imports from Iran? Iraq depends on Iran for about a third of its power generation during the peak summer months. Baghdad received a 90-day waiver in March to continue importing Iranian energy, but that is set to expire in June and, unlike Iran's other energy customers, Baghdad has no practical alternative for natural gas and electricity imports.
How will Iran respond? Iran will ratchet up its rhetoric about shutting down the Strait of Hormuz or using Yemen's Houthis to halt maritime traffic through the Bab el-Mandeb, but the country faces significant restrictions in actually shutting down either chokepoint even if it could stage a one-off attack on a tanker. Tehran will also take a long look at whether it wants to respond by withdrawing from the Iran nuclear deal — although doing that could prompt the United States to stage a limited military strike on nuclear targets in Iran, which, accordingly, would threaten more oil production in the region.