US sanctions on Iran to have limited effect on crude trade and tanker demand

The United States (US) unilateral withdrawal from the Iran Nuclear Deal is unlikely to have any significant impact on the global crude oil trade and tonnage demand in the tanker market,as long as the deal is honored by the other signatories, and Saudi Arabia and other producers are willing to fill the possible shortage in global oil supply.

The US has unilaterally withdrawn from the Iran Nuclear Deal, also known as the Joint Comprehensive Plan of Action (JCPA), accusing Iran of continuing nuclear activity. It has also re-imposed sanctions on Iran’s energy, petrochemical, shipping and financial sectors with a grace period of six months. Businesses have a six-month wind down period for Iran dealings, otherwise, entities transacting in US dollars or that have operations in the United States, will be barred from accessing the US banking and financial system. The US Treasury Department has advised foreign buyers of Iranian crude and refined products to curb their imports during the 180-day wind-down period to qualify for exemptions from sanctions.

Although the pre-nuclear deal sanctions resulted in about a 1 million bpd drop in Iran’s crude exports, the impact of sanctions this time around will be much less prominent due to the absence of full support from Europe and Asia. While China has made it clear that it will continue to imports Iranian crude as along as the nuclear deal is intact, crude imports by other Asian buyers will be hinged on the Europe’s stance on the issue over the next six-months.

At this stage, European leaders look determined to fight US’s effort to renew sanctions on Iran. As long as Europe is in JCOPA and European insurance companies keep providing insurance cover for Iranian crude trade, the impact on Iran’s oil exports will be muted as almost all Iranian crude exports moves to Europe (30%) and Asia Pacific (70%). Turkey, France, Italy, Spain and Greece are the key buyers of Iranian crude in Europe accounting for about a third of total Iranian exports.

While Turkey is expected to continue to import Iranian crude, integrated oil companies (IOCs) and refiners in Europe with foot prints in the US will feel the heat of US sanctions. Still, as the volume of Iranian crude imports by IOCs is very small, the overall impact will be modest. Even if European countries align with the US, scrapping JCOPA, the impact on Iranian exports will still be lower than the previous sanctions as China, which imported about 650 kbpd of Iranian crude in the first quarter of 2018, will continue to import Iranian crude. Meanwhile, any decline in Iranian crude exports would lead to the return of about 17 of National Iranian Tanker Co (NITC) vessels to floating storage, reducing tonnage supply in the market.

Moreover, as Saudi Arabia is willing to work with major OPEC and non-OPEC producers to fill any gap in global oil supply on account of the US sanctions on Iran, global crude oil trade is unlikely to see any significant change. Saudi Arabia, the UAE and Kuwait are collectively producing about 200 kbpd lower than their agreed production levels, which can be used as a buffer for any drop in Iranian supply. For any decline in Iranian production beyond 200 kbpd, OPEC and non-OPEC producers will have to revise the production quota to fill the gap. But in all likelihood, oil producers, especially Saudi Arabia would try to keep production at levels which will support oil prices around $80 per barrel.

Source: hellenicshippingnews