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Iran Sanctions – US Says No More Waivers, US/OPEC+ Can Closely Match Iran Exports To Zero

By Dan Tsubouchi

The big news today was the US clearly stating they are not going to give any more waivers to import Iranian oil and condensate.   The US seemed to shoot down any suggestions that this would be another Nov scenario where the US talked tough and then backs off at the last minute and give waivers. We believe markets had been pricing in an extension of waivers for some period at lesser levels. Today’s US position led to WTI being +$1.61 to $65.68 and Brent being +$2.07 to $74.04. Will oil go higher still? It depends on three key questions – are there enough barrels to offset Iran exports going to zero? If so, will the added barrels be enough to bring oil prices down? What does it mean to put Iran’s back to the wall?  We are posting blogs on each of these questions over the next two days. Today’s first blog tries to answer the question are there enough barrels to offset Iran’s oil and condensate exports to zero? We think the answer is the added US and OPEC+ barrels can closely match a loss of Iran oil and condensate exports.

No question, the oil market was surprised on Sun to hear the US was going to say no more waivers for Iran sanctions after May 2.  Oil markets became surprised on Sunday with the Washington Post story that the US was going to announce no more waiver from Iran sanctions. On Mon morning, the White House and US State Dept announced that they were not going to give any more waivers from sanctions for countries that import Iran oil and condensate.   The Pompeo statement today seemed, to most part, very clear “Today we are announcing the United States will not issue any additional Significant Reduction Exceptions to existing importers of Iranian oil.” It wasn’t just the press statement, but Pompeo comments post the announcement.  We listened to his interview [LINK] specifically to hear if he gave any hints for any transition or grace period. In the interview, Pompeo describes the Nov 2018 waivers as a way to give waiver countries time to ween themselves off of Iranian oil, and to ensure a well supplied oil market. Pompeo then said, “Any nation interacting with Iran should do its diligence and err on the side of caution, the risks are simply not going to be worth the benefits” and “We’re going to zero. We’re going to zero across the board”,

Ties to US State Dept clear warning and oil market outlook from their Apr 2 press briefing  We have to give the US credit as they clearly told us this was happening at an Apr 2 US State Dept press briefing [LINK] exactly one month before the May 2 end of Iran waiver period.  The US brought out Special Representative for Iran and Senior Advisor to the Secretary of State Brian Hook, who gave a clear message – the US is going to accelerate the move to zero Iran exports ie. take more barrels off the market and this is the right time to do so as they forecast better supply/demand dynamics as opposed to last Nov.

In early Apr, we thought that either Trump had a secret deal with KSA or was going to release SPR.  The Hook Apr 2 comments that there was a better supply/demand comment didn’t make sense compared to the supply/demand outlook last Nov.  The summer is the seasonally high oil demand period, they were making a May 2 decision ahead of the OPEC+ June meeting to decide on cuts extension, Venezuela is getting worse, and US oil growth may be a little slower than expected with lower drilling/capex. But Hook was clear – the US was going to take more Iran barrels off the market and pointing to do so on May 2.  At that time, we wrote if they want to do this moving into the peak demand season for oil, they must either have a deal with Saudi Arabia to increase production or they are planning a release of a significant amount of oil for an extended period from the Strategic Petroleum Reserve (SPR).  Its why we tweeted on Tues night [LINK]US State Dept forecasts excess oil supply, right time to take more Iran oil off the market, “accelerate our path to zero” and avoid price spikes. Must know KSA/Russia will increase oil or plan to release a lot of SPR oil reserves.” It now appears they had a secret deal with Saudi Arabia in the works on Apr 2.

In theory, it means 1.239 mmb/d of oil and 0.184 mmb/d of condensate have to be replaced on global oil markets.  There are still uncertainties as to the exact level of Iran oil and condensate exports given the reports of tankers turning off transponders and going dark. This means that Iran’s exports are very likely a little bit higher than expected.  However, based on the recent Bloomberg data for Feb 2019, it looks like Iran’s oil and condensate exports are likely 1,2398 mmb/d of oil and 0.184 mmb/d of condensate.  These are the estimated “exports” and, therefore, the volume of new “exports” that are needed if Iran’s exports are cut to zero.  If anything, we think the actual level of exports might be a little higher given the reported use of dark tankers (transponders turned off) that aren’t likely in these Bloomberg estimates.

Bloomberg Iran Oil And Condensate Exports Feb 2019

Source: Bloomberg

US says US/Saudi/UAE and “other” major producers will ensure sufficient supply.  When looking at the potential to replace the Iran barrels, we believe the math should also assume Russia, Iraq and Kuwait increasing oil production and exports.  The US State Dept said “We have had extensive and productive discussions with Saudi Arabia, the United Arab Emirates, and other major producers to ease this transition and ensure sufficient supply. This, in addition to increasing U.S. production, underscores our confidence that energy markets will remain well supplied.”  There was no mention of Russia, Iraq and Kuwait, but we expect they aren’t going to sit back and keep production at their cut levels and watch Saudi Arabia and UAE increase oil production. Russia has been the most likely to push for ending the quota cuts and Iraq has been the biggest cheater to the quota cuts.

If so, the math says OPEC+ can probably add ~0.9 mmb/d to export markets by restoring production to Oct 2018 reference levels ie. before the OPEC+ cuts.  We think the math shows that Saudi Arabia, UAE, Russia, Iraq and Kuwait can add enough production to closely match the loss of ~1.4 mmb/d of Iran and condensate exports. But increasing oil production to the same level does not translate into barrel per barrel increase in oil exports. In other words, OPEC+ increased exports should fall short of replacing a loss of Iran’s ~1.4 mmb/d of exports. As we will highlight in Part 2 of the blog series, increased Saudi Arabia oil production in the summer does not translate into the same level of increased oil exports. (i) Saudi Arabia and UAE could add 948,000 b/d to production returning to Oct 2018 reference levels, but less to oil exports to replace Iran.  If we use the Oct 2018 reference barrels as somewhat reflective of capacity and the OPEC MOMR Secondary Sources for March 2019.   Saudi Arabia is producing 839,000 b/d less than Oct and UAE is 109,000 b/d less than reference.  If they both go back to reference levels, that would add 948,000 b/d to production. We don’t know the precise increased oil demand in Saudi Arabia in May/June/July/Aug vs Sept, but the incremental Saudi Arabia domestic oil demand in the summer is likely 400,000 to 500,000 b/d.  We don’t have splits for how much, if any, oil UAE uses for summer electricity, but adjusting only for Saudi Arabia, would take Saudi Arabia/UAE increased oil exports to ~500,000 b/d.  If Saudi wants to increase oil exports by 839,000 b/d, they will have to release oil from its inventories.  (ii) Russia is currently >200,000 below their Oct 2018 reference levels.  We expect Russia will return these barrels to the market.  (iii) Iraq has been the biggest cheater and we have to believe will want to go back to Oct 2016 levels ie. add 131,000 b/d. (iv) Kuwait is producing 100,000 b/d less than Oct 2018 reference levels.  Assuming there are no problems from the limited fire at its big Burgan oil field, it could go back up.

OPEC MOMR Secondary Sources for Mar Vs Oct 2018 Reference Levels

Source: OPEC

However, adding the expected increase in US oil production means the US/OPEC+ can closely match the loss of all Iran oil and condensate export amounts.  We have not done a separate analysis on replacing Iran’s condensate, which may not be a given wit the recent South Korean refineries issues with Eagle Ford condensate. Rather, we have looked at the need to replace the total of Iran’s oil and condensate export total of ~1.4 mmb/d. The US rightly includes itself in the major producer list to ensure adequate supply. This is due to their (EIA) forecast that US oil supply will be increasing in Q2, Q3 and Q4. The EIA’s Short Term Energy Outlook April 2018 [LINK] forecasts US oil production to be +0.45 mmb/d in Q2/19 vs Q1/19, and +0.15 mmb/d in Q3/19 vs Q2/19.   And adding the estimated growth in US oil supply puts the total to right around the ~1.4 mmb/d potential loss of Iran’s oil and condensate exports.  This assumes Iran’s exports are cut to zero and there isn’t cheating.  The US and OPEC+ can closely match the lost of Iran’s exports of ~1.4 mmb/d.

EIA Estimated US Crude Oil Production By Forecast Month

Source: EIA, SAF

Will closely matching the loss of Iran’s ~1.4 mmb/d exports be enough to drive oil prices down?  This first blog shows our math for why the US and OPEC+ can closely match the loss of Iran’s ~1.4 mmb/d exports and do so on a relatively timely basis.  The second blog (no later than midday Tues) outlines our concern that, even with higher US oil production and a return OPEC+ Oct 2018 reference production levels to levels that can closely match Iran’s oil exports to zero, we think the oil market stays tight and oil prices are likely to keep going higher in the short term.  That is, unless there is an added boost to supply from the SPR or Saudi oil inventories.

The key wildcard to move oil prices lower will likely be a release from the US Strategic Petroleum Reserves or Saud oil inventories to bring oil prices down.  So far, the argument and math for replacing Iran barrels has been from increasing oil supply.  There has not been any discussion so far on releasing oil from the US Strategic Petroleum Reserve (currently 649.1 mmb) or from Saudi Arabia’s oil inventories (Joint Organizations Data Initiative est 204.567 mmb vs all time peak of 329.430 mmb in Oct 2015).  Blog 2 of our blog series will note why we believe the US SPR and/or Saudi oil inventory will likely come into play if the US wants to keep a lid on oil prices.

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