So, U.S. sanctions on Iran were fully implemented on Monday, fully but not completely, rather as Miracle Max in “The Princess Bride” says “mostly dead is a little alive.” Waivers were granted to eight major customers of Iran that will allow them to continue importing oil as long as they are phasing them out, reassuring the oil traders that the world won’t end for at least a few more months. And while many allied governments have said they won’t accommodate U.S. sanctions, oil companies under their jurisdictions have indicated they will do not wish to risk legal problems and so will simply avoid doing business with Iran.
Earlier sanctions against Iran were relatively effective, with production declining by about 1 mb/d, but implied exports remained at roughly 1.5 mb/d. This was despite the participation of most of the major governments in the world, and highlights the limits of sanctions that are not enforced by military means. (As sanctions against Saddam Hussein’s Iraq were.)
Unilateral sanctions have a long, largely dismal history. U.S. sanctions against Cuba were primarily successful in that they gave the regime way to rationalize their dismal economic performance which resulted from their socialist economics, thereby prolonging the country’s pain. Sanctions by some oil exporters against Israel have had a fairly minor effect, showing that even a combined effort by major suppliers can be ineffective.
Of course, embargoes have sometimes resulted in military conflict, whether intentionally or not. Athens’ embargo of Megara in 432 B.C. was a primary reason for the outbreak of the Peloponnesian War and the U.S.-U.K. oil embargo against Japan in 1941 led that nation to initiate warfare with the attack on Pearl Harbor. It doesn’t seem likely that sanctions on Iran will have the same impact, but it could result in lower-level violence, especially given Iran’s Revolutionary Guards’ penchance for asymmetrical violence. Sabotage or terrorist attacks could have an impact on the petroleum industry in the Gulf, although such has long been threatened without follow up.
The biggest uncertainty related to the oil market is how well Iran can evade sanctions, given certain changes in the technology of the industry. For one thing, satellites can be used to track tankers including those that turn off their Automatic Information System which removes them from the monitoring system, but doesn’t mean they can’t be tracked.
The challenge for Iran is less evading detection for its exports but receiving payments for its oil. If the U.S. is successful in employing the SWIFT banking exchange system to punish importers in countries that might otherwise buy Iranian oil, it could seriously reduce sales. But there may be many methods to work around such sanctions, especially the use of middlemen, small traders who can mix the Iranian crude with other supplies and use varying less traditional payment means. (Or more traditional, like cash or gold.)
Again, though, recall that evasion of sanctions has a long history, including Iraq after its 1970 nationalization of foreign holdings, when the country avoided legal sanctions by selling oil to the Soviet Union, which swapped it out for its own supplies. The Russians are apparently already buying up 100 tb/d of Iranian oil, which has a quality similar to Urals crude, one of the main Russian export blends. Whether they will expand this trade isn’t clear, since reportedly they are offering barter goods, not cash, but one presumes with profits of a few dollars a barrel, that could change.
The oil price increased this fall to $80 for Brent and $70 for WTI based on expectations that Iran’s crude oil exports would fall by at least 1 mb/d and probably more, and Venezuelan production would keep falling. Now, as it appears that other producers (including the U.S.) are offsetting a large portion of the possible losses, while the drop in exports will be less rather than more, prices have retrenched by about $10 a barrel. However, it not only remains unclear how much Iranian oil exports will drop and over what time frame, but it will be unclear for some time to come. Data will be lagged and unreliable, while rumors and isolated data move prices up and down.
More important to the market should be the prospects for Kurdish oil exports to increase (300 tb/d), the Neutral Zone between Saudi Arabia and Kuwait to return to production (500 tb/d), and the global economy might slow (500 tb/d or more). These, combined with even modest success on the part of Iran in evading sanctions, could mean that supplies remain abundant and prices weak.
On the other hand, with the U.S. election past, Saudi Arabia should no longer feel that it needs to dampen oil prices to satisfy the Trump Administration, as well as perceiving that prices have already fallen “enough” especially in light of the new contango. In which case, allowing their own sales to creep downward to avoid another price collapse would probably seem a wise strategy for Riyadh. This implies prices will remain weak but not plummet, as some have suggested. The turning point will come when some news from Saudi Arabia convinces traders that prices have bottomed out.