Q1: What does the reimposition of U.S. Sanctions on Iran mean for oil markets?
A1: In last week’s commentary we argued that the oil supply and price impacts of the Iranian decision would largely be determined by the details of the coverage, structure, implementation, and enforcement mechanisms that accompanied the decision. The fact that the decision—at least at this juncture—appears to be unilateral (i.e., the United States going alone while the other Joint Comprehensive Plan of Action [JCPOA] signatories have indicated their intentions to abide by the agreement) suggests that negotiations with allies and other oil suppliers will be ongoing and that market impacts will unfold over months not weeks. How the president addresses the issue of secondary sanctions on allies and others will be impactful, but the fact that yesterday’s decision also included language to reimpose an extensive list of sanctions covered under statutes beyond the National Defense Authorization Act (NDAA) of 2012 suggests the administration is prepared to assume a highly aggressive posture on this issue.
Some EU states that find themselves at odds with the administration are likely to seek waivers or possibly introduce blocking legislation at home, though many may try to find a way to appear to directionally accommodate the president’s effort. Large importers like China and India are likely to continue Iranian purchases, and Russia has previously offered to market Iranian barrels. At first blush, the reimposition of U.S.-only sanctions is expected to be less effective in (volumetrically) reducing Iranian oil exports than the sanctions achieved by the multilateral coalition during the Obama administration.
That said, the White House/Treasury Department fact sheets accompanying yesterday’s announcement answered some questions. For example, on timing, the document specified that sanctions on petroleum-related transactions and those involving Iran’s energy sector will be reimposed following a 180-day “wind down period which ends November 4, 2018” (although importers are encouraged to reduce uptake volumes in the interim), but it also left vague or unanswered several critically important issues. Left unaddressed/unspecified were issues related to overall export targets/reductions (are the sanctions aimed at blocking all Iranian crude oil exports or some subset tied to a more recent base period?), the definition and application of “significantly reduced” in determining importing countries’ compliance with the directive, how the president will determine that adequate alternative oil supplies exist and are available (and at what price) to buyers looking to find barrels to replace lost Iranian oil, and even the definition of the scope of covered petroleum products. In the latter case, the fact sheet definition of covered petroleum products under the NDAA sanctions appears to exclude gas condensates from coverage but includes lease condensates associated with crude oil production and natural gas and other compounds obtained from the processing of crude oil.
For the rest of the article, please see the CSIS website.