How serious are the US sanctions on Iranian oil production and exports?

The United States government has not stopped its attempts to close Iran’s oil exports, and recently, Iranian officials have answered back, by threatening to block the Strait of Hormuz. Such a result is highly unlikely, but however, ongoing word war between the two countries shows how fast the confrontation has escalated.

Oil prices rose in late June when a US State Department official declared that countries were expected to completely stop importing oil from Iran. The official also suggested that it was unlikely that Trump would grant any exemptions.

This, in turn, led to higher oil prices as the oil market had to recalibrate expected losses from Iran, with the general consensus changing from a loss of about 500,000 bpd by the end of the year to more than a million barrels. It is difficult to compensate for a loss of this scale, even if Saudi Arabia decides to burn all its spare capacity.

Preliminary evidence suggests that Trump managed to persuade major buyers of Iranian oil to limit their purchases. South Korea reportedly plans to cut its oil imports from Iran in August. Japan plans to buy oil from Iran in the next few months, but is likely to be under pressure to cut imports as the November deadline approaches, sources said.

Iran managed to keep exports from being negatively affected in June, with trading volumes mostly unchanged despite higher exports in other sectors offset by lower crude oil exports.

Export flows to Europe fell sharply and Europe accounted for about a third of Iranian sales.

South Korea, Japan and Taiwan bought more Iranian oil in June, offsetting Europe’s slide.

The real difficult part will be in persuading China to curb Iranian exports, as presently, the country is still defying US demands and Beijing does not recognize the imposed US sanctions on Iran.

The EU, which still hopes to keep the nuclear deal with Iran, hopes to limit the impact of the US sanctions. Foreign ministers from Britain, China, France, Germany and Russia held talks on July 6 with Iran’s foreign minister in an effort to preserve the nuclear deal. However, that will only be possible if Iran gets the benefits of the deal, which includes oil exports. The group of world powers hopes to develop an economic package that will help Iran enough to maintain the country compliance with the nuclear deal.

This, however will be a difficult task because European companies are moving away from Iran, while their governments insist they will support their investments. All this means that a large part of Iranian oil exports will be cut during the second half of this year. Economic pain will add more pressure to the government, which is already struggling with increasingly distressed populations.

Another thing to watch is the ongoing protests in Iran. The demonstrations in Iran are very serious and many of them are now concentrated in oil-producing areas. Therefore, Iranian oil may face some serious production problems if these demonstrations continue to escalate.