Washington’s announcement that it will not extend its sanctions waivers for key importers of Iranian oil – China, India, Turkey, Japan and South Korea – raises the geopolitical stakes in the oil market and beyond.
While last week’s column argued – wrongly – that the waivers would most likely be extended, the view that oil price risks were weighted to the upside now looks something of an understatement.
Washington’s decision to engage in what is, in effect, gun boat diplomacy will have both short and long-term consequences.
The immediate impact was a $2/barrel jump in crude prices. Whether this is sustained or extended now depends critically on two factors: the degree to which importers of Iranian crude comply with the threat of sanctions; and the speed with which Saudi Arabia and other producers can ramp up production to address any shortfall.
Iran is currently estimated to be exporting just shy of 1 million b/d of crude, primarily to China, India and Turkey. Given the sharp cuts in Saudi output since the end of last year and spare capacity existing prior to that, the Kingdom should be able to provide the volumes required to replace lost Iranian barrels.
Moreover, Washington’s decision, with Saudi support, represents a green light for all producers to end restraint and produce whatever they can. Some have no capacity to do so, while for others – Venezuela and Libya – there is a real possibility…