US ends sanctions waivers on Iranian oil imports

US ends sanctions waivers on Iranian oil imports

The Trump administration said it would eliminate waivers that allowed Japan, India and China to import Iranian oil despite US sanctions as part of an escalating effort to put pressure on the regime in Tehran

Mike Pompeo, the US secretary of state, is to announce the move to to end waivers when they expired in early May, according to a senior US official. South Korea and Turkey would also be hit by the change.

Brent crude climbed 2.7 per cent on Monday to $74.12 a barrel in afternoon London trading, after hitting a high of $74.31 in early Asia trading. West Texas Intermediate, the US marker, rose as much as 2.6 per cent to a high of $65.87 in early New York trading, the highest intraday level in two weeks.

The move comes just weeks after the US branded Iran’s Revolutionary Guard a foreign terrorist organisation, the first time it formally labelled part of another country’s government as terrorists.

Oil prices have risen sharply this year, peaking above $72 a barrel due to voluntary and involuntary cuts by members of Opec, the oil producers’ cartel, that have tightened supply.

Reducing Iran’s production capabilities “is going to make an already tight market even tighter, especially with supply risks in Libya and Venezuela”, said Jason Bordoff, an oil adviser to then US president Barack Obama’s administration and director of the Center on Global Energy Policy at Columbia University in New York.

After US president Donald Trump withdrew from the Iran nuclear deal in May 2018 and moved to reimpose sanctions, US officials signalled that he would not provide exemptions to allow some countries to import Iranian oil. But Washington eventually agreed to some waivers, partly because the administration was concerned about the effects of a tight oil market on the US economy.

On Sunday, the senior US official said the administration had decided that conditions in the oil markets now were more conducive to eliminating the waivers. He added that the US had been in negotiations with Saudi Arabia and the United Arab Emirates to help offset the impact of taking Iranian oil out of the market.

The decision was first reported by The Washington Post.

While the US hopes its traditional oil-producing allies will raise output, this decision is not without complications. Saudi Arabia boosted production sharply last year before the US reimposed sanctions on Iran. But Riyadh was largely blindsided by the US decision in November to include waivers for many of Iran’s main customers — including China, India, Japan and also Turkey — which triggered a dramatic sell-off in prices.

Since then, Saudi Arabia has led Opec by sharply cutting output while the UAE has indicated it will not make the same mistake this time, saying it will only raise production if shortages emerge.

The latest forecasts from major agencies including Opec and the US Energy Information Administration see the market in a deficit of up to 500,000 barrels a day this year, before more supplies from Iran — and possibly Venezuela and Libya — are lost.

The end of waivers could have political implications in the US. Mr Trump has made low petrol prices part of his economic pitch to voters ahead of the 2020 election and has warned Opec not to boost prices too high.

US production, led by sharp increases in shale output, has soared in the past decade, making the country the biggest producer. But the US still remains reliant on imports for more than a third of the crude that it refines, and US domestic gasoline prices are still closely linked to the global market.

Few oil analysts believe the US will ever be able to completely stop Iran’s crude exports, especially to China where trade talks with Washington may complicate efforts to sever Beijing’s ties to Tehran. China had “always opposed” the US sanctions, foreign ministry spokesman Geng Shuang told reporters on Monday.

Yoshihide Suga, Japan’s chief cabinet secretary, insisted there should be no “negative effect on the operations of Japanese companies”, adding that Tokyo would be “exchanging views closely” with Washington on the issue.

A complete removal of waivers is likely to curb Iran’s exports to below 1m barrels a day, down from 1.9m in March according to industry database

Saudi Arabia and Russia are due to meet other oil producers in Jeddah next month to decide their next steps. A formal meeting of the Opec+ group, including Iran, is planned for June. “How much oil prices rise will largely depend on whether Saudi Arabia and other Opec+ nations ramp output back up to offset lost Iranian barrels,” said Mr Bordoff.

Saudi Arabia’s March production was 440,000 b/d below the cap agreed in December, according to S&P Global Platts. The UAE appears to have less headroom, with Platts estimating its production last month at just 200,000 b/d under the cap.

The US move will put further strain on Iran’s economy, which is sliding towards a deep recession after the US imposed sanctions last year.

It also puts Washington at odds with European allies, which have been working with Tehran to create a mechanism that would allow continued trade with Iran despite US sanctions.

Additional reporting by Lucy Hornby in Beijing and Robin Harding in Tokyo.

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