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Oil Wars

  • Saturday, December 15, 2018

Khalid A. Al-Falih  Minister of EnergyThe US administration’s sanctions against Iranian oil exports came into force on the 4th November. This includes sanctions on corporations buying Iranian oil or trading with their central bank. Without a waiver agreement, foreign oil firms will face the risk of being excluded from the US market including being banned from accessing US capital markets and SWIFT, the dollarized world payment system.

These sanctions are being implemented after the US pulled out of the Iranian Nuclear Accord as a tactic to prevent the advancement of Iran’s nuclear capacity. Britain, Germany and France were against the US actions.

At the start of the embargo, eight countries had agreed a temporary waiver with US authorities to allow their oil companies to continue purchasing oil from Iran on the condition that they stop or significantly reduce purchases by at least 50% by March 2019. Amongst the eight countries granted a temporary waiver were India, Japan, Italy, Taiwan, Greece, Turkey, South Korea and China. The Trump administration allowed these waivers so that Iran’s eight largest export markets had time to source new oil importers and in order to avoid a significant hike in oil prices.

While the EU is trying to maintain and preserve the Iranian Nuclear deal, Europe’s multinational oil companies have dropped their business ties with Iran due to the threat of US sanctions on their businesses in the USA. Total, for example has suspended all activity in Iran.

India is Iran’s second biggest oil export market and has agreed with the US to reduce its current import volumes by two thirds. While Indian oil refineries have cut down on Iranian imports, China’s main oil refineries have stopped importing Iranian oil. It is expected that unless Iran ends its nuclear programme then all the temporary waivers will end with heavily reduced levels of oil being exported from Iran. The country will then inevitably feel the full economic consequences on not being able to export its main asset.

In the run up to the sanctions Iran’s fleet of gigantic crude carriers, which is the second largest fleet in the world, started switching off their GPS devices to make it harder to monitor their movements. Iranian backed militia have retaliated by attacking and sinking Saudi Arabian tankers in the Red Sea. Iran’s leader Hassan Rohani has threatened to shut the Strait of Hormuz to restrict the shipment of a fifth of the world’s crude.

This embargo on all oil exports from Iran could see the supply of oil reduced by as much as 1.7 million barrels per day and potentially lead to shortages. World oil prices peaked at US$86pb at the beginning of October as concern grew over how existing oil producers would fill the expected loss. However, the number of waivers granted to foreign countries and the general slowdown in demand has initially take the pressure off oil prices. Initially traders were concerned about too little supply but OPEC and Russia have boosted production by 1m barrels per day. The US has used the murder of journalist Jamal Khashoggi to pressure the Saudi Crown Prince to increase production to over 11m barrels per day. US oil companies are also opening an increased number of rigs to boost production. US crude oil production is expected to hit 12m barrels per day in 2019 which will take the pressure off the price post waivers.

Since the sanctions were introduced oil prices have actually fallen by 27% to US$63pb as increased oil production has offset initial concerns. Demand for oil has fallen due to the slowing of China and fear over the outcomes of a prolonged US – China trade war may have on the global economy. This slowdown has eased concerns over the impact of initially losing the supply of 1 million barrels of oil per day.

As Saudi Arabia, OPEC and Russia are currently producing oil at near their maximum extraction rates, additional supply could come from oil producing countries like Libya, Canada, Kazakhstan, Nigeria, Mexico and Venezuela but unfortunately these counties are less reliable producers. How OPEC, American shale oil and Russia respond to the Iranian exile will be key to ensuring a stable oil market.

While oil dependency is reducing, particularly in recent years with oil alternatives being developed, oil supply and the oil price still has a major impact on global economics.

Demand for oil has fallen due to the slowing of China and fear over the outcomes of a prolonged US – China trade war may have on the global economy.


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Chris Davies

Chris Davies

Chartered Financial Adviser

Chris is a Chartered Independent Financial Adviser and leads the investment team.