The Trump administration has briefed journalists on background that it will review sanctions waiver applications on a case-by-case basis and work with countries that are reducing their oil imports from Iran. AP photo by Evan Vucci.
Waivers to sanctions may be the only way avoid sharp oil price increases
By John Kemp
LONDON, July 11 – The Trump administration’s top diplomat has indicated the United States might grant waivers to some countries allowing them to continue importing Iranian crude when sanctions snapback in November.
“There will be a handful of countries that come to the United States and ask for relief,” Secretary of State Mike Pompeo said on Tuesday in a television interview with Sky News Arabia. “We’ll consider it.”
In a separate briefing for reporters travelling with the secretary, a senior State Department official elaborated on recent discussions between U.S. diplomats and their Saudi counterparts.
“In our meeting with the Saudi energy minister, we discussed maintaining a well-supplied oil market to guard against volatility,” the unnamed official told reporters in a background briefing.
“We coordinated – we discussed U.S. oil sanctions to deny Iran revenue to finance terrorism. We talked about minimizing market disruptions and helping partners find alternatives to Iranian supply of oil,” the official added.
It remains unclear whether the latest comments from Pompeo about considering applications for waivers, and his unnamed briefer, represent a softening of the administration’s position.
Zero or not?
Press briefings given earlier this month suggested that the administration’s goal was to reduce Iran’s oil exports to zero, possibly with effect from November.
“Our goal is to increase pressure on the Iranian regime by reducing to zero its revenue from crude oil sales,” a senior State Department official told reporters at a press briefing earlier this month.
“We are working to minimize disruptions to the global market, but we are confident that there is sufficient global spare oil production capacity,” Brian Hook, the director of policy planning, said on July 2.
“We are not looking to grant licences or waivers broadly on the re-imposition of sanctions, because we believe pressure is critical to achieve our national security objectives.”
On the other hand, the administration has also briefed journalists on background it will review waiver applications on a case-by-case basis and work with countries that are reducing their oil imports from Iran (“U.S. says to work with allies to cut Iran oil imports“, Reuters, June 28).
The current position seems to be that sanctions will definitely snapback on Nov. 4 but the United States will “consider” applications from “a handful” of countries to be allowed to continue importing some oil.
The compromise would ensure at least some Iranian oil continues reaching the global market, as it did under the previous sanctions in force between 2012 and 2015.
There are doubts about whether Saudi Arabia and other producers can increase output by enough to cover all the 2.4 million barrels per day (b/d) of Iranian oil exports if sanctions attempted to push them to zero.
Waivers and exemptions allowing at least some Iranian barrels to continue being exported may be the only practical way to re-impose sanctions without risking a sharp spike in oil prices.
Price increases are especially sensitive at this time because the re-imposition of sanctions coincides with U.S. congressional elections on Nov. 6.
Despite multiple briefings and statements by senior U.S. officials, the administration’s policy on sanctions and oil supplies remains unclear.
The ambiguity may be intentional to increase pressure on Iran, but it is also maximising uncertainty in the oil market about future supplies and is likely to keep upward pressure on prices.
Traders, refiners and hedge funds have been left without a clear picture of how much oil will be available to the market towards the end of the year and into 2019.
Because the oil market is forward-looking, uncertainty about supplies in the final quarter and next year is directly affecting prices now.
Market participants will be looking for clarity from the State Department on several key issues as they try to assess the severity of sanctions and oil availability:
(1) If the administration’s target is not zero oil exports, how much crude does the United States plan to allow Iran’s customers to purchase without imposing financial penalties on them?
(2) If there are to be sanctions exemptions, which countries and/or companies will receive them, on what basis will they be granted, and will sanctions relief be conditional?
(3) Has the United States reached an agreement with Saudi Arabia (and perhaps also the United Arab Emirates, Kuwait and Russia) to offset the impact of oil volumes lost from Iran?
(4) Is the imposition of sanctions, and granting of waivers, being coordinated with the European Union (especially France, Germany and Britain) and with Russia and China?
Under the last round of oil sanctions, in effect from 2012 until early 2016, Iran was still able to continue exporting reduced volumes of crude amounting to around 1 million b/d, mostly to customers in Asia.
If the United States plans to allow a similar volume of exports this time, it would cut exports by around 1.5 million b/d, but the administration has given no indication about likely export volumes beyond November.
Last time, refiners in Japan, South Korea, India, China and Turkey were among those that continued importing limited volumes of Iranian crude, without financial penalties from the United States.
In most cases, sanctions exemptions were implicitly or explicitly conditional on promises to reduce the volume of imported Iranian crude over time (“Iran sanctions“, Congressional Research Service, June 29, 2018).
The administration has given no indication of whether the same countries will be exempted this time and if so on what conditions.
France, Germany, Britain, Russia and China have all pledged to uphold the 2015 nuclear agreement, which eased sanctions on Iran in return for limits on the country’s nuclear activities.
These five countries have been negotiating a package of economic measures to provide Iran with an incentive to remain within the agreement, accept continued restrictions on nuclear activities and permit inspections.
The contents of the economic package have not been published but Iran has indicated an early draft does not go far enough (“Negotiations over saving Iranian nuclear deal to continue“, Radio Free Europe, July 6).
France has indicated the package might only be ready by November and Germany has said it will not be able to fully compensate for the re-imposition of U.S. sanctions.
The tougher the U.S. sanctions, the more they reduce Iran’s oil export revenues, the more economic incentives that the other foreign powers may need to offer Iran to persuade the country to abide by the agreement.
There may therefore be a link between the waiver process between the United States and Iran’s refining customers on the one hand, and the negotiations the Europeans, Russia and China are holding with Iran on the other.
China trade dispute
The other awkward linkage is between U.S. sanctions on Iran and the U.S. trade dispute with China over intellectual property protection, technology transfers and the bilateral trade imbalance.
China is one of the largest importers of oil from both the United States and Iran.
China has already targeted oil imports from the United States for retaliation in the trade dispute.
If China stops buying crude oil from the United States, it will need to find other sources of supply, one of which might be Iran.
China’s leaders must make a tricky calculation. The country might actually increase oil imports from Iran to express its displeasure with the United States and diversify its crude supply.
But that would be provocative and risk secondary sanctions being applied to China’s major oil companies – many of which have business dealings with the United States.
Alternatively, China could leave its imports from Iran unchanged, reduce them and apply for waivers, or cut them to zero.
Heeding sanctions would avert a further intensification of disputes with the United States but reduce China’s oil buying options, reduce its supply security, and risk further upward pressure on oil prices.
China has so far matched U.S. actions at each step of the bilateral trade dispute, but it has not sought to escalate the conflict, so the country may try to avoid the provocation of increasing oil imports from Iran.
If the U.S.-China trade dispute continues to worsen, however, sanctions policy could become entangled in the broader strategic conflict between the two superpowers.
(Editing by David Evans)
John Kemp is a Reuters market analyst. The views expressed are his own.