The Impact on Oil Markets amid The Highest Level of Economic Sanctions on Iran

The historical withdrawal of US from the Iranian nuclear deal will impose “The Highest Level of Economic Sanctions”. The withdrawal of US came after Iran failed to return to the international community as a natural peaceful member without its criminal activities, destabilizing behaviors and sponsoring terrorism, interfering in the affairs of other countries to destabilize security and spread chaos in the region.

Prior to the US withdrawal, some market analysts expected a partial withdrawal, while others drew hypothetical scenarios to mitigate the impact of US sanctions on Iran on global oil markets. Yet, the strong action taken yesterday by the US president Trump will impose could be more severe than the latest sanction imposed from 2011 to 2014 when oil prices rose above $100/bbl.

Definitely, there will be consequences in global oil markets that will lead to shortage of oil supplies and tightness in balances, which can only be covered by Saudi Arabia who has the highest maximum sustainable capacity (MSC) that can increase oil production to reach around 12.5 million barrels per day from nearly 10 million barrels per day produced in April 2018 - with 113% compliance rate in output cut.

The resumption of economic sanctions will severely impact Iranian oil exports that lately reached a record of about 2.6 million barrels per day last month, the highest level since the entry of its nuclear deal agreement with effect in January 2016. Moreover, Iran is dreaming of the impossible return of the 1970s record oil production, when the maximum production was 6.6 million barrels per day in November 1976, while the production average during the past 40 years did not exceed 3.8 million barrels per day - very close to Iran production reached recently.

Iranian total exports of crude oil and condensates combined amounted to 2.8 million barrels per day lately, most of these exports go to the Asian refineries in China, India, South Korea and Japan - as China and India alone import around 1.4 million barrels a day, the remainder goes to the European market and Turkey, so if India and China can penetrate the economic sanction again and deal with the Chinese Yuan and the Indian Rupiah or any other means of sawap deals - Europe and Turkey will not be able to penetrate this sanction - and thus will reduce oil supplies by at least one million barrels a day, which will underpin higher oil prices.

The road is not paved for Iran with the international oil companies to invest in upstream projects - There are, therefore, significant questions about the possibility of future expansions in production. Hence, the return of economic sanctions will hinder the possibility of securing a large amount of liquidity to support upstream projects in oil and gas.

Trump effectively dropped the nuclear deal with Iran and explicitly stated that the billions of dollars that have returned to Iran after the lifting of economic sanction had been used to support terrorism and spread chaos in the region - while the deteriorating Iranian economy had never benefited from them. The nuclear agreement in early 2016 did not contribute to improving the standard of living of the deprived Iranian citizens, but deepened their problems and surfaced more.

Iran ranks 180 out of 187 countries in the inflation index. Surprisingly however, the World Bank and the International Monetary Fund have overstepped all norms by polishing Iran's fragile economy, showing it as a strong and promising economy, while Iran's economy is shaken by its shady path and its dubious history. They also tried chartered writers, politicians and institutions with organized action in order to return the life to the dying Iranian economy, which was already killed by the foolishness of Iran’s destructive policies, and eaten by worms of corruption.

Dr. Faisal Mrza

@faisalmrza

Energy and Oil Marketing Adviser (Former OPEC / Saudi Aramco)