Who will be real winners of US decision on ending waivers for Iran?

Oil&Gas Materials 26 April 2019 09:20 (UTC +04:00)
The real winners of US decision on ending waivers for Iran will be Saudi Arabia, the UAE, Kuwait, and Russia, which will enjoy a rising oil revenue and a growing market share at the cost of Iran
Who will be real winners of US decision on ending waivers for Iran?

Baku, Azerbaijan, April 26

By Elnur Baghishov – Trend:

The real winners of US decision on ending waivers for Iran will be Saudi Arabia, the UAE, Kuwait, and Russia, which will enjoy a rising oil revenue and a growing market share at the cost of Iran, Iranian economy expert Mehrdad Emadi told Trend.

"The decision of the US government to revoke the exemptions from the Iranian oil export sanctions has already caused a 3 percent plus price increase in the oil market. Though both Saudi Arabia and the UAE have stated that they will do their outmost to fill in the gap left from the reduction in supply from Iran, the psychology of the global market is now firmly set on an inflationary path for the rest of the year," he said.

Emadi noted that in addition, markets have become quite pessimistic about the horizon relating to oil supply and price stability. "This is partially fuelled by the Revolutionary Guards’ repeated statements that should Iran be prevented from exporting its oil, the Strait of Hormuz will be unavailable to the Arab countries of the Persian Gulf to export their oil."

"The markets seem to expect a price range of $70-77 per barrel for the near future. This effectively means a price rise of 4-7 percent compared to only two weeks ago. Such a price rise would mean an increase of $ 5-6 billion per month in the income of the oil-producing countries which would be an increase of approximately $65 billion in costs to consumers," added the expert.

Given the heightened level of risks in the markets triggered by recent events, it is reasonable to assume that oil-importing nations, most notably India, China, Japan, and the US, will bear the brunt of this increase in their trade balances, with India specifically showing a rise in its trade deficit, the expert believes.

"The real winners in this situation will be Saudi Arabia, the UAE, Kuwait, and Russia, which will enjoy a rising oil revenue and a growing market share at the cost of Iran."

Emadi believes that Iran will try to use its fleet of tankers, especially the leased segment, to export its oil under different flags.

"However, given the threat of US sanctions, buyers may only be interested if they are offered heavy discounts. These discounts will be similar to those offered in the previous period of sanctions before 2015 JCPOA agreement. During the pre-2015 period, Iran also had to provide insurance for the tankers carrying its crude, which in some cases cost Iran four times the standard cover payment. Though the zero export level is unlikely to be seen, and Iran is likely to continue exporting crude, its revenue from sales will see a significant drop due to the price discount it will have to offer buyers, the fees it has to pay to middle men and agents, and lastly the corrosive payments made to agents engaged to circumvent the sanctions," said the expert.

He reminded that in the previous round of sanctions, Iran lost 10-15 percent of the payments received in fees to these agents, which were mostly linked to the Revolutionary Guards.

"In this context, even if Iran continues to export oil, the revenue per barrel for Iran will fall so steeply that the US Treasury may claim that it has succeeded in restricting Iran’s ability to export oil. The claim of Iranian authorities to have found ways to circumvent the new restrictions, while possibly partially factual, should be seen as a face-saving position. At best, Iran may be able to sell around one million barrels a day, but based on the previous rounds of sanctions this figure will generate only around 700,000 barrels of oil sales per day due to discounts, middle-man fees, and illegal payments to agents. This will leave Iran with an annual income of less than US$ 20 billion per year or a third of its income from oil exports in the previous year."

He believes it is quite probable that the US government will introduce sanctions against Iran’s petrochemical sector as well as the export of natural gas in the near future.

"I expect that most countries will comply with US demands, though in most cases this will be under duress and at the cost of the further cooling off of their relationship with the United States. Those few who will resist US demands will expect deep discounts for their continued business. Should the new restrictive measures prove to be nearly as effective as the oil sanctions, the financial impact on the economy of Iran will be most severe."

The sanctions on the Iranian oil exports will most probably result in price rises of 3-8 percent, depending on the the increased level of production by Saudi Arabia, Russia, Iraq and the UAE. Potentially, Saudi Arabia, the UAE and Russia could see a rise of close to US$ 30-35 billion in income over the next twelve months, Emadi said.

"In the long term, the sanctions will encourage further increases in the production of shale oil as well as the rapid expansion of newly-discovered oil fields in Iraq and in the Caspian-rim countries. The consequences of these effects, ironically, will be lower crude prices and lower income per barrel for the oil exporting countries. This is congruent with previous periods of major price fluctuations during which, after each significant and lasting price rise, the capacity expansion saw a period of stable and lower prices for crude oil. I also suggest that the current situation will give added impetus in energy-dependent economies to move away from fossil fuels and energy-import dependency."

The US State Department has said that the country won’t issue additional reduction exceptions to existing importers of Iranian oil.

"United States will not issue any additional Significant Reduction Exceptions to existing importers of Iranian oil. The Trump Administration has taken Iran’s oil exports to historic lows, and we are dramatically accelerating our pressure campaign in a calibrated way that meets our national security objectives while maintaining well supplied global oil markets. We stand by our allies and partners as they transition away from Iranian crude to other alternatives. 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," reads the message.