US launches plan to eliminate Iranian energy exports

The United States has tightened sanctions on Iranian oil on Thursday in an attempt to cut the Islamic Republic’s exports to zero, which could lead to a new era of uncertainty in the oil market.

President Donald Trump has restored the sanctions imposed by Obama last year, but granted waivers to eight countries, allowing them to import limited quantities of Iranian crude. Last week, his administration surprised the market by announcing that it would not extend the waivers.

Analysts were expecting Trump to tighten the waivers every six months, allowing China, India, Turkey and other importers to gradually abandon Iranian crude purchases. The abrupt move to cut Iranian exports threatens to eliminate most of the shipments, which recently totaled more than 1 million barrels per day, or nearly 1 percent of the global consumption. To fill this gap and prevent rising fuel costs, Trump turned to his allies in Saudi Arabia, the world’s largest oil exporter.

But the Saudis have not made firm commitments and are continuing to consider extending a six-month deal to limit production with the OPEC member states and other producers. This raises concerns about the period of supply contraction and high oil prices.

Analysts said that “President Trump’s decision to zero out waivers for importers of Iranian oil on May 2 represents an audacious act of oil brinkmanship as the strategy of keeping prices contained now rests almost exclusively on Saudi Arabia’s willingness to open the taps amid accelerating global supply outages,”

Oil prices jumped initially to a six-month high after Trump announced the cancellation of the waivers. Brent crude rose $75.60 and US crude rose to $66.60. Prices were trading around $71 and $62, respectively, on Thursday.

Analysts consider that the stricter sanctions alone would not affect supply, but would make the oil market more vulnerable to shortages leading to higher fuel costs.

This is partly because the oversupply in the oil market is slowly disappearing, and supply and demand are in equilibrium. Some analysts believe the market is suffering from a slight undersupply. At the same time, supply disruption and threats of further interruptions are widespread.

US sanctions on PDVSA have accelerated the decline in crude production in the country. In Libya, renewed conflict between rival leaders has jeopardized OPEC oil supplies. Nigeria, Africa’s biggest producer, has also suffered an outrage. In Europe, the polluted oil sent by a pipeline from Russia has disrupted supplies to refineries in several countries.

At the same time, OPEC and its allies, including Russia, are still trying to keep 1.2 million barrels per day off the market. Trump is putting pressure on the Saudis and OPEC to reverse, but many analysts doubt the so-called OPEC alliance would take his advice.

The group increased production before US sanctions on Iran in November, and was surprised when Trump granted import waivers. OPEC’s oil flood and weaker-than-expected sanctions contributed to the collapse of Brent from $86 to $50 a barrel and pushed producers to agree in December to cut output.

Saudi Arabia needs oil prices around $80 a barrel to balance its budget. The Kingdom’s oil minister, Khalid al-Falih, has been holding his comments since Trump announced the sanctions waiver, stressing that the kingdom will respond to the shortage. However, the country pumps about 500,000 bpd under its quota for the OPEC deal, so the Saudis can raise production and keep the OPEC deal in place. The group meets on June 25 and 26 to discuss the extension of the agreement.

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