Donald Trump’s plan of isolating Iran is quite likely to backfire
In short, the global oil supply chain can handle the loss of 500,000 bpd of Iranian crude, although doing so may come at the cost of higher prices
Nusa Dua, Indonesia — Saudi Arabia is in pole position to be the major beneficiary of US President Donald Trump’s decision to walk away from the Iranian nuclear deal and re-impose sanctions on the Islamic Republic.
It’s little surprise that one of the few voices of support for Trump’s move was from Saudi Arabia, the main rival to Iran in the volatile Middle East.
The Saudis stand to enjoy a double-whammy windfall as crude oil prices may remain strong and state producer Saudi Aramco will also likely to be able to pump more oil to replace any Iranian barrels lost because of the re-imposed sanctions. A cherry on top of this is that customers who had been turning away from Saudi crude, such as the world’s top importer China, may be forced to buy more from the Kingdom.
This would allow the Saudis to regain market share lost since the 2016 deal between oil cartel Opec and allies, such as Russia, to reduce output in order to tighten global oil markets.
The main risk for the Saudis is that the US decision inflames an already tense situation in the Middle East, resulting in increased conflict and even the possibility of outright war. However, the Saudis are probably taking a calculated risk that the conflict situations won’t worsen much and, in the meantime, they stand to gain a financial windfall and weaken their key rival at the same time.
Whether the eventual reality aligns with what the Saudis hope for is inherently uncertain, but there are some points worth noting.
First, despite the usual flourish of belligerence and flamboyance in Trump’s announcement, not much is likely to happen for several months. This is because the US treasury department has indicated that sanctions won’t be re-imposed immediately, but that it will take up to 180 days to allow Iranian oil customers and other companies involved in doing business with Tehran to make plans.
It’s also not clear what sanctions will be re-imposed and in what form, with the main risk being the so-called secondary sanctions that would target companies that do business with other entities involved with Iran.
Replacing Iranian oil
This means for the moment it is pure speculation as to how much Iranian oil may be lost to the market. Most analyst estimates seem to vary from about 200,000 to 500,000 barrels per day (bpd) being at risk, which would be enough to add to an already existing tightness in global crude markets.
However, it’s also worth noting that even the upper end of this range could be replaced relatively easily by the rest of Opec and its allies party to the agreement to restrict production. In addition, crude exports from the US also have the capacity to increase, especially if oil prices remain high, thereby incentivising shale producers to drill more wells.
In short, the global oil supply chain can handle the loss of 500,000 bpd of Iranian crude, although doing so may come at the cost of higher prices.
It also remains uncertain as to how buyers of Iranian crude will respond to the US decision. Virtually all of them, from Europe to Asia, vehemently disagree with Trump’s move.
China’s imports from Iran were 655,000 bpd in the first quarter, up 17.4% from the same period in 2017 and enough to make Iran the sixth biggest supplier, although the gap to number five Brazil is miniscule. China imported 1.1-million bpd from Saudi Arabia in the first quarter, down 5.7%, making the Kingdom the second biggest supplier behind Russia.
India, Asia’s second biggest crude importer, brought in 522,700 bpd of Iranian crude in the first quarter, down 8.8% from the same period last year. The South Asian nation’s imports from Saudi Arabia were up 1.9% to about 811,000 bpd, but the big mover was imports from Iraq, up a massive 45% to 1.13-million bpd.
While both India and China have scope to lower their imports from Iran, they will likely be reluctant, especially given the ongoing dispute over pricing between China’s top refiner Sinopec and Saudi Arabia.
The most likely outcome is that Asian crude buyers will do only the barest minimum to give the appearance of complying with whatever measures the Trump administration takes — or even openly defy them. The least likely outcome is that Asian countries co-operate fully with the US in its renewed conflict with Iran.
While the next months are likely to be characterised by uncertainty, it’s likely the US is going to find it considerably harder to make the rest of the world bend to its will this time, especially when the major financial beneficiaries are its own oil producers and the Saudi Arabians.