Shippers can expect increased crude oil and diesel prices in the near-term, as well as sustained volatility following the shift in US policy regarding Iranian oil waivers.
The End of Iranian Oil Waivers is the Beginning of More Diesel Price Volatility
The global oil market has contemplated the effects of Iranian economic sanctions on oil prices since US President Donald Trump announced the US would withdraw from the Joint Comprehensive Plan of Action, also known as the Iran nuclear deal, on May 8, 2018. We anticipate the latest change in policy – the Trump Administration’s decision to end import waivers beginning in May 2019 – will put pressure on oil and refined product prices. This has encouraged us to increase our Q2 2019 wholesale diesel average to about $2.85 per gallon, with less impact over the longer-term. This post addresses the scope of potential impacts for strict sanctions while discussing what the discontinuation of waivers means for the crude oil and diesel markets as 2019 continues.
How much Iranian oil will leave the world market?
Iranian crude oil exports finished March at about 1.3 mmbd, or just over half of the pre-sanction total of 2.5 mmbd reached in April 2018. Most of the remaining Iranian exports (about 1.1 mmbd) make their way to a few key markets, which were granted US sanction waivers in October 2018. During March, only China, India, Japan, and Turkey were still importing Iranian crude among the eight countries that received waivers to continue their oil trade with Iran. The chart below shows the decline of Iranian oil exports to these countries.
While the US has chosen not to extend waivers for Iran’s largest customers, the likelihood that these countries’ March import total of 1.1 mmbd leaving the market immediately is unlikely. China was provided a waiver for 360,000 barrels of oil per day (mbd) in October but has surpassed their import allowance during five of the six months the waivers have been in place. India has imported less oil than its waiver allowed during the first quarter of 2019 but will need to source over 250 mbd of oil elsewhere in a tightening oil market. If the plunge in Iran’s exports from October to December (shown in the chart above) is any indication, it will likely take at least a couple months for these countries to halt their Iranian crude oil imports.
What does the US waiver deadline now mean for the coming OPEC+ meeting in June?
OPEC and its production-cutting allies (OPEC+) pushed their April meeting to June 25-26 after determining their production cuts should remain in place during the first half of 2019. The delay also allowed the Saudi-led group to assess how US sanctions on Venezuela and Iran would impact the oil market.
Following the US decision to end waivers for Iranian oil buyers, Saudi leadership confirmed US statements regarding its intentions to ensure adequate oil on the world market. Saudi Energy Minister Khalid Al-Falih acknowledged this in a public statement, “In the next few weeks, the Kingdom will be consulting closely with other producing countries and key oil consuming nations to ensure a well-balanced and stable oil market, for the benefits of producers and consumers as well as the stability of the world economy.”
This statement will place OPEC exports under a microscope ahead of the next OPEC+ meeting at the end of June, particularly if oil and refined product prices experience pronounced price increases from a tightened global oil market. US oil production growth will remain critical to balancing global price pressure as well.
How have diesel prices responded to this news?
Diesel prices have responded quickly each time US policy toward Iran has been adjusted, beginning with the reintroduction of economic sanctions in May 2018. The chart below calls attention to the three most important policy dates for US-Iran sanctions during the past year.
The US departure from the Iran nuclear deal and creation of import waivers for major Iran oil customers were part of pivotal market moments during the second and fourth quarter of 2018. The US departure from the nuclear deal helped prices increase by over $0.15 per gallon in May. The subsequent creation of waivers in October helped the market collapse to end 2018, in part due to the geopolitical risk bubble sanction uncertainty had created. Of course, no individual event may be isolated in its market impact, and several market drivers impacting diesel prices over these periods in 2018 proved to be at least as important as any news of Iranian sanctions.
Bearing the previously discussed details and history of US-Iran sanctions in mind, our expectations are for crude oil and diesel prices to increase in the short-term and remain more volatile for the longer-term as a consequence of a tightening global oil market. The decision to end Iranian waivers, when isolated, could lead to a similar price response as we experienced in May 2018. We have adjusted our Q2 2019 forecast average to about $2.85 per gallon, while adjusting our full 2019 forecast by less than $0.05 per gallon.
For now, market risk for US sanctions catalyzing further unrest between Iran and Arab states of the Persian Gulf are low. Other market developments, such as growing civil conflict in Libya, macroeconomic risks, production decisions from OPEC and its allies, and continued growth for US production are likely to be more prominent influences on prices moving forward.
Please contact us should you have questions regarding the market effects of the US decision to end waivers for buyers of Iranian oil and to learn more about our forecast and outlook across transportation energy markets.