How Ending Iran Waivers Affects the OPEC+ Oil Cuts

The US is ending waivers which let countries buy Iranian crude without running afoul of sanctions, threatening to squeeze oil supplies in an already tight market.

 

The decision may also jeopardise the deal which OPEC and allied suppliers including Russia reached to limit output until the end of June to buttress crude and avert a glut.

 

The producers are to meet next month to assess the market and again in June to decide whether to extend cuts.

 

  1. What happened?

Washington said it will not renew exemptions from US sanctions for buyers of Iranian crude after the waivers expire on the 2nd May. The announcement on the 22nd April marks a reversal from last November when the US granted waivers to eight importers as it sought to damp fuel prices ahead of mid-term Congressional elections. The decision is aimed at reducing Iran’s oil exports to zero.

 

  1. What’s the impact on Iran oil buyers:

The buyers — China, India, Japan, South Korea, Italy, Greece, Turkey and Taiwan — may now have to find alternatives. Indian state refiners have firmed up oil supplies from other sources for next month as a contingency plan. State-run Indian Oil Corporation, the country’s biggest buyer of Iranian crude, also said it has built in optional volumes in its term contracts with Kuwait, Abu Dhabi, Saudi Arabia and Mexico. China, the largest buyer of Iranian crude, reiterated its opposition to unilateral sanctions on the 22nd April.

 

  1. What’s the effect on the market?

Curbing Iran’s production capabilities “is going to make an already tight market even tighter, especially with supply risks in Libya and Venezuela,” Petromatrix Managing Director Olivier Jakob wrote in a report. Recent battles in Libya put the that country’s oil exports at risk, while Venezuelan exports have slumped amid a political crisis.

 

  1. Who can make up for missing Iranian barrels?

The US said it has secured commitments from producers including Saudi Arabia and the United Arab Emirates to offset the loss of Iran’s crude. The Saudis will coordinate with fellow producers to keep adequate supplies available to consumers while ensuring the oil market “does not go out of balance,” Energy Minister Khalid Al-Falih said after the US announcement.

 

Saudi Arabia and the UAE are ready to boost output to offset any drop in output from Iran, according to people with knowledge of the matter. They can increase their combined production by about 1.5 million barrels a day within a short period, they said.

 

The additional oil would more than compensate for losses from Iran, which shipped about 1.1 million barrels a day of crude and condensate in the first half of April, tanker-tracking data compiled by Bloomberg show.

 

  1. What does this mean for the OPEC+ cuts deal?

The US decision will make it harder for OPEC and its allies to maintain supply discipline. Russia has already signalled that the cuts may not need to be extended after they expire in June, and its Economy Ministry sees the nation’s crude and condensate output increasing slightly in 2019, according to its five-year outlook.

 

The current output-cuts agreement was driven by Saudi Arabia after the US blindsided the kingdom last year by granting waivers — a decision which triggered a sell-off and a slide in crude prices. Since then, the Saudis and Russia have led the so-called OPEC+ coalition in sharply cutting output.

 

Yet if Saudi Arabia pledges to boost output to a certain level to offset Iranian losses, it will have a hard time persuading others to limit their own production.

 

Source: Rigzone