The United States demanded a cutoff of Iranian oil exports to major importers such as China and India, which had been granted exemptions from sanctions, sending crude prices to six-month highs on fears the U.S. action could lead to a supply crunch.
Secretary of State Mike Pompeo, in a briefing on Monday, said the aim was to halt Iran’s exports entirely, as it continues to put pressure on Tehran to curtail its nuclear program, ballistic missile tests and support for conflicts in Syria and Yemen.
The Trump administration said it was working with top oil exporters Saudi Arabia and the United Arab Emirates to ensure the oil market was “adequately supplied” but the market, already fretting about tight supplies, raised skepticism about whether Riyadh could take a slower approach in boosting exports.
The United States reimposed sanctions in November on exports of Iranian oil after U.S. President Donald Trump unilaterally pulled out of a 2015 nuclear accord between Iran and six world powers last May. After renewing sanctions, it granted waivers to eight major buyers for a six-month period, which ends in May.
“We are going to zero. We’re going to zero across the board,” Mr. Pompeo said, adding that the United States had no plans for a grace period beyond May 1 for countries to comply. He said the aim is to deprive Iran of its lifeline of US$50-billion in annual oil revenues.
The international Brent crude oil benchmark rose to more than US$74 a barrel on Monday, the highest since November, due to the uncertainty surrounding increased supply from Saudi Arabia and other OPEC countries, while U.S. prices surpassed US$65 a barrel for the first time since November.
In Canada, Western Canadian Select, an Alberta heavy-crude benchmark, rose 2.9 per cent to US$55.49 a barrel on Monday. Thus far in 2019, WCS has surged 87 per cent. Earlier in April WCS hit its highest level of the year at US$56.30.
Mr. Pompeo said he was confident of Riyadh’s commitment to making sure there was sufficient supply in the market. Saudi Arabian Energy Minister Khalid al-Falih said on Monday the OPEC exporter would co-ordinate with other oil producers to ensure a balanced market. He said it was “monitoring the oil market developments” after the U.S. statement, without committing to raising production. The Organization of Petroleum Exporting Countries is next scheduled to meet in June.
QUESTIONS ABOUT WORLD SUPPLY
While the kingdom is expected to boost output again, analysts fear the U.S. move – along with sanctions on Venezuela’s oil industry – will leave the world with inadequate spare capacity.
“Combined with declines in global crude stocks, continued losses in Venezuela production as well as a possible disruption in Libya, a zero-waivers Iran decision will present a challenge to keeping global oil prices in check,” Joe McMonigle of Hedgeye said in a note to clients.
In recent months, Saudi Arabia and other OPEC members have cut supply dramatically. OPEC, along with allies such as Russia and others, agreed to reduce output by 1.2 million barrels a day (b/d) but they have exceeded those benchmarks, with Saudi Arabia alone reducing supply by 800,000 b/d.
In a tweet, Mr. Trump said Saudi Arabia and others in OPEC “will more than make up the Oil Flow difference in our now Full Sanctions on Iranian Oil.”
After sanctions, Washington granted waivers to eight economies that had reduced purchases of Iranian oil, allowing them to continue buying without incurring sanctions for six more months. They were China, India, Japan, South Korea, Taiwan, Turkey, Italy and Greece.
The United States had been deliberating during the past couple of months whether to renew some of the waivers while avoiding a spike in oil and fuel prices that could hurt U.S. consumers.
Mr. Trump has been clear to his national security team over the past few weeks that he wants the waivers to end and national security adviser John Bolton has been working the issue within the administration.
Iran’s exports have fallen to less than one million b/d from more than 2.5 million b/d before sanctions were reimposed a year ago.
Tehran remained defiant over Washington’s decision, saying it was prepared for the end of waivers, while the Revolutionary Guards repeated their threat to close the Strait of Hormuz, a major oil shipment channel in the Gulf, Iranian media reported.