Will US extend sanction waivers?

US sanctions on Iran’s oil sector and the waivers of said sanctions are causing rifts among the US administration—pitting the National Security Council and the US State Department against each other as the deadline for waiver extensions draws near.

Oil Price in the article U.S. Squabbles Over New Iran Sanction Waivers with the reference to Bloomberg writes, that US President Donald Trump is caught in the middle of the now-public squabble, as anonymous sources “familiar with the debate” disclosed the infighting to the media. Many others, too, have publicly decried the extension waivers or the sanctions, including oil-dependent economies that have long relied on Iran’s oil such as India, South Korea, Taiwan, Japan, China, and others—some of which enjoy peaceful relations with the United States.

President Trump campaigned heavily on scrapping the nuclear deal with Iran, and made good on that promise in May 2018. A few short months later, he announced that the United States would levy sanctions on Iran in a move that while somewhat predictable, shocked oil markets nonetheless. Prices rose on the announcement, but later fell when Trump announced in November that the United States would grant some of Iran’s most oil-thirsty customers waivers to continue purchasing specific amounts of oil from Iran. The US administration granted said waivers after finding itself in quite the pickle, weighing the pros and cons of being tough on Iran, appearing tough on Iran, keeping a lid on oil prices, and keeping the peace with the likes of India, Japan, South Korea, and other US allies who would find it hard indeed to comply with zero oil purchases from Iran. When Trump announced the sanctions, many were expecting him to stick to his hardline approach, and were unhappy with his decision to offer waivers to so many countries—eight in total—and oil prices plummeted as the market predicted global inventories would no longer be drawn down as quickly as they had planned.

The issue with sanctions on Venezuela and Venezuela’s already-declining oil production added another level of complexity to the oil markets and to the decision about just how much of a hardline approach is too much, and how much is not enough. This complexity is precisely why we are seeing divisions now, with another decision soon to be made on extending those waivers. According to the sources, the group taking a hardline approach favoring no more waivers includes the National Security Council—John Bolton specifically. Other hardliners include presidential advisor Larry Kudlow, and Republican Senator Ted Cruz. Their argument is that Iran is not being squeezed tightly enough, and that it may be able to withstand the incomplete nature of the US sanctions, and that as a result, it may be unmotivated to make concessions to forge a new nuclear deal. The opposing group is made up of the US State Department led by Mike Pompeo, who is in favor of treading more carefully with US allies who will feel the pinch if the waivers are not extended.

Waivers or no, Iran has seen a drop off in its oil production, despite the Iranian government’s insistence that the US sanctions would have little effect on its oil industry. Using OPEC’s data from secondary sources, we can see that Iran’s oil production has dipped by more than 1 million bpd since the re-imposition of the sanctions, even with the waivers granted to some of Iran’s largest customers. Canceling the existing waivers—the move toward zero exports—would shave off a great deal more. The US has engaged in some chest-puffing with regards to “zero exports” out of Iran, but sober-minded individuals should see the folly in the likelihood of that absolute term, wisdom aside.

Chances are that the reality of what’s to come will be found in some middle ground, with Trump axing or reducing some waiver limits while keeping others. When oil markets react to the decision—whatever it is—it will be, similar to last time, short-term. With more oil barrels out of the mix, especially with Venezuela’s exports dwindling as well, oil prices will likely spike. Fears will be quickly assuaged, however, as Saudi Arabia and the rest of OPEC, and even non-OPEC members, have the capacity to restore oil production well beyond current levels, which is an artificially reduced level designed to shave barrels off what it sees as an oversupplied market. This perceived oversupply will drive Trump’s decision in the coming days. The current round of waivers expires in May, and prices are expected to remain volatile at least until then.