What Happens To Iran's Oil Exports If Sanctions Are Renewed: Goldman Explains

Tyler Durden's picture

President Trump is poised to announce over the coming days, that the landmark Iran nuclear agreement is no longer in the national interest of the United States. While the so-called “decertification” would not be the fatal blow to the Iran deal that Trump promised on the campaign trail, it would kick the issue back to Congress, which could potentially pull out of the deal entirely.

Supporters of the move say it could provide leverage to renegotiate the deal or have follow-on deals, and signal to Iran that the United States will not put up with other activities the United States sees as destabilizing but are not governed by the deal.  There is also a risk that such a move could backfire: Iran has already warned that more sanctions would be seen as a hostile aggression.

"The Americans should know that the Trump government’s stupid behavior with the nuclear deal will be used by the Islamic Republic as an opportunity to move ahead with its missile, regional and conventional defense program," Guards’ commander Mohammad Ali Jafari said, quoted by Reuters. He then explicitly threatened US presence in the region, warning that “if America’s new law for sanctions is passed, this country will have to move their regional bases outside the 2,000 km range of Iran’s missiles."

But even if no hostile actions follow, a major risk is that - as we wrote explained in November of 2016 in "Will Trump Send The Price Of Oil Soaring?" - as a result of the fallout from the Iran's decertification, the return of sanctions could have a vast impact on the Iranian, and global, oil market. As Goldman's Damien Couravlin writes, a decertification by Trump would put at risk the lifting of Western sanctions that have allowed 1 mb/d of Iranian oil to return to the market. Sitll, other signatories of the deal have however continued to voice their support of the deal (Reuters), with Iran further stating today that it was open to talks about its ballistic missile arsenal, seeking to reduce tension over the disputed program (Reuters).

In other words, the question over Iran's crude oil output - should full sanctions return - is whether Europe would follow the US in resuming the embargo on Iranian oil exports, and whether Iran can find enough Asian market to offset the drop in European demand. Here is Goldman's Damien Courvalin with the full explanation:

Iran back in the forefront of oil geopolitical risks

 

Beyond the uncertainty of what the US administration will announce, we believe the lack of international support for renewed sanctions exacerbates the uncertainty on any potential impact on oil exports. European buyers, which account for 25% of Iran’s 2.2 mb/d crude exports, could potentially stop their purchases to avoid falling foul of US secondary sanctions if those sanctions are unilaterally reimposed. We believe the key to the global oil market is whether these flows will be curtailed rather than simply redirected to Asia with the potential impact of eventual US sanctions on international insurance and shipping key to this outcome. 

 

Exhibit 1: The key to future Iranian production will be the ability to redirect flows to Asia if US secondary sanctions get reintroduced  

 

Net, we would expect that if US secondary sanctions are renewed, they would initially put at risk a few hundred thousand barrels of Iranian exports. Without the support of other countries, however, it is highly unlikely though that production would fall back to its pre-deal levels or that a drop in export is imminent.

 

The Trump administration has to certify to Congress on October 15 that Iran is compliant with the nuclear deal reached in 2015. The US president has been a vocal opponent of the agreement and the Washington Post reported yesterday that President Trump would announce soon that he will decertify the international deal to curb Iran's nuclear program. While we take no view on the President's decision, a decertification would put at risk the lifting of Western sanctions that have allowed 1 mb/d of Iranian oil to return to the market. The other signatories of the deal have however continued to voice their support of the deal (Reuters), with Iran further stating today that it was open to talks about its ballistic missile arsenal, seeking to reduce tension over the disputed program (Reuters).

 

There remains high uncertainty on what President Trump will announce. The Defense Secretary this week instead stated that it was in America’s interest to stick to the deal (Reuters). Further, the administration certified compliance in both May and in July. If President Trump refuses to certify compliance, the US Congress would have 60 days to consider options including re-imposing secondary sanctions on Iran and could decide not to act although a president executive order could bypass such an obstacle. National security waivers were used to suspend US secondary sanctions on Iranian oil exports, and President Trump could potentially cancel these waivers, which would lead to a ‘snap-back’ of the prior sanctions into place, without any requirement for Congress involvement.

 

Beyond the uncertainty on what the US administration will do, we believe the response by the other signatories (Britain, France, Germany, Russia, China, the EU) will be key to any potential oil impact. International comments from other major participants in the JCPOA (Joint Comprehensive Plan of Action) have been supportive of the agreement in its current form (Reuters). Today (10/6) alone a European commission spokeswoman commented that the deal was working, that it could not be renegotiated and that it was a ‘durable, long-term solution to the Iranian nuclear issue’ (Bloomberg). This has been backed up by a German Foreign Ministry spokesman suggesting that the Iranian nuclear deal was ‘important’ and worth keeping (Reuters), whilst the Russian Foreign Minister suggested that it was ‘very important to preserve it in its current form and of course the participation of the United States will be a very significant factor in this regard’ (Reuters).

 

Since the lifting of sanctions, production in Iran has increased by c.1mnb/d, with crude exports of 2.2 mb/d and around 0.5 mb/d of condensate. Around 60% of the export volume goes to Asia, with China (600kb/d), India (c.450kb/d), South Korea (c.300kb/d) and Japan (c.100kb/d) being the largest buyers. Since the lifting of international sanctions, European buyers have again started to take Iranian volumes, with around 25% now going to Europe[2]. From an oil market perspective, the risk is that even if other signatories continue to support the deal, European buyers could potentially stop their purchases to avoid falling foul of US secondary sanctions if those sanctions are unilaterally reimposed. This would leave Iran having to find alternative buyers, which would likely be in Asia where it sold its crude during the prior sanctions. It remains unclear whether US sanctions alone would impact the ability of international insurance and shipping companies to support this trade which was key to reducing overall Iranian flows in 2012-2015. Absent such a shipping constraint, the production impact should remain limited by the ability of Asia refiners to absorb displaced European volumes. As a result, while highly uncertain, we would expect renewed US secondary sanctions to initially put at risk a few hundred thousand barrels of Iranian exports.

 

Iran is seeking help to invest in major new field developments to boost production following the lifting of international sanctions. There have been several MOUs (Memorandum of understanding) signed to explore projects under the new Iranian Petroleum Contract, for example several international oil companies are set to present technical and commercial development plans for the Azadegan field (including Shell, Total, Inpex and Rosneft), but few firm commitments have been made for now. If US sanctions were re-imposed, western international oil companies would find it difficult to operate in Iran in our view, leaving a much smaller group of companies willing and able to invest, which might impact future production growth plans. One deal has gone through, with a 20 year agreement signed in July to develop South Pars phase 11 with Total (50.1%) and China National Petroleum Corp (19.9%, with Petropars owning 30%). If US secondary sanctions were re-imposed on Iran and should Total pull out of the deal, other partners could potentially take control of the project and move forward with the development alone.

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junction's picture

The Squid knows all, tells all to its muppets.

Maybe the squid can explain this about the Las Vegas shooting:

You notice how the Las Vegas police are now filling in the gaps to shooter Stephen Paddock’s resume?  First there were only rifles in his room.  Now they allege they found a handgun there.  Then there was there problem of Stevie never going to the gun range near his Mesquite, Nevada home.  Now there are reports of him target practicing in the desert.  Everyone does that, blasting away with a semi-automatic rifle near desert highways.  The latest is the notes the cops found (strangely, two detectives were part of the original team of SWAT cops sent to Paddock’s room) showing Paddock was skilled at computing the range and angle of his human targets.  Every accountant knows how to do that.

http://www.latimes.com/nation/la-las-vegas-shooting-live-updates-the-tri...

Alphin said there was “no way” the shooter maintained such a steady kill zone by dumb luck. Steady nerves and planning are a better explanation for the casualty rate, he said.

“How did this guy get trained that well? Where did it come from?”

evoila's picture

Pulling out of JCPOA will mean that you go short USD. Massively. 

Anarchyteez's picture

Started stacking again last week.

Omen IV's picture

The Keystone Cops ran the operation so now they have to improvise - but too many people watching this time connecting the dots  - they will not get out of this so easy

 

the Government should just declare the event a False Flag with the intent to take out gun rights and we will cease and descist

Omen IV's picture

The Keystone Cops ran the operation so now they have to improvise - but too many people watching this time connecting the dots  - they will not get out of this so easy

 

the Government should just declare the event a False Flag with the intent to take out gun rights and we will cease and descist

guru69's picture

Great analysis of the possible embargo of Iranian oil.  Got ADD?

historian40's picture

Goldman around Trump, you know they already had this memo ready months ago.

BlindMonkey's picture

ruble and BTC.  

 

close enough?

07564111's picture

all interchangeable :D :D

I think that Iran will be OK no matter which this go :)

Blue Steel 309's picture

The entire oil game, which is an extension of the petro-dollar game, is based on divorcing the price of oil from supply and demand. The supply is for practical purposes, unlimited (minus avg cost of extraction). The whole oil market is a demonstration on why capitalism is not superior to socialism and vice versa. Economic systems are a means to an end. It is the end that needs to be discussed.

Backwards planning. It is all competing greedy sociopaths, until that discussion happens.

Yog Soggoth's picture

This is really simple. Iran has had plenty of time to prepare, and will not be caught with their pants down. Donald puts sanctions and congress backs, then price of gas in Europe goes up, putting a further strain on the EU. This also pushes the oil towards the other more than half of the world, that is already getting off the petrodollar. USA had better have a plan. If I were a country, I would see any sanctions by another a declaration of war. The only good part is the destruction of the EU.

WTFUD's picture

No mention of France and yet a long term deal for Iran condensate/oil was signed there recently for another half million bbls month with 2 similar deals to follow. The oil's bound for China with France/EU getting their cut/commissions.

That's 1.5 Million bbls per month alone, that i'm privy too. How many dozens of others are pending?

German companies have opened scores of Joint Venture Factories/Plant in Iran covering various sectors ( Solar/ Wind Energies, Automobiles, Electricity Transmission/ Transformers, Cement . . . . .

With German exports stagnant/falling in the EU, the Russian, Iranian & Chinese Markets are vital to their own economic survival/prosperity and therefore the US would be jeopardizing 10's of thousands of jobs; won't wash with the 'New' Parliament. Merkel couldn't swing this US Sanction Horseshit, even if she wanted to.

johnnycanuck's picture
‘World will change’: – German FM

 

"The US withdrawal would only complicate relations with Tehran, Gabriel said, adding that nothing good “will come of us treating Iran as though it is developing nuclear weapons.” Apart from that, it creates dangers for Germany and the international community as a whole, as sinking the nuclear deal would mean the US “replacing the rule of law with the law of the strongest.”

“And that is a great danger for us, because if the [US] takes that course, then the world will change,” Gabriel warned.

https://www.rt.com/news/406065-iran-nuclear-deal-germany/

 

^Cryptic^

peopledontwanttruth's picture

It could also mean that the world tells the USA screw you and your green toilet paper.

Let us not forget the Iranians and the Germans are related. I said it years ago. Iran will rise out of nowhere and Europe particularly Germany will join them.

Blood is thicker than water

HRClinton's picture

I hope that Europe stands it's ground against the (((Neoco'ens))), and does not impose sanctions.

If the US then chooses to impose sanctions on Europe, then it becomes naked truth, that its many close EU allies and partners matter less than precious fucking Israhell.

Let Americans and the whole world witness America's bondage and servitude to its Jewish masters.

Let us all see their show of hands. For the Record, Posterity and... Rebalancing.

New_Meat's picture

Oil == "Fungible"

shinobi-7's picture

The risk if the US goes full "Empire" with the law of the strongest is that it will suddenly have very few friends to rely on. Even if it doesn't lead to war, confrontation with North Korea in Asia and Iran in the Gulf will at the very least be a golden opportunity to advance whatever risky move you may have been waiting for an opportunity to occur. If there is war, the US will learn the old Chinese axiom that a big stick is most useful when you do not have to use it! 

Arrest Hillary's picture

"Walk softly .... and carry a big stick !" Teddy Roosevelt .... MAD Mutually Assured Destruction was all about that ?

Arrest Hillary's picture

If Iran wants to take a knee .... they'll lose customers .... ask Colin ?

WTFUD's picture

Does Donny know that Iran has existed for 3000+ years and will still be one of the last men standing?

Cutter's picture

Europe, China, and Russia will take Iran's oil and reexport what they don't need.  It was a multiparty agreement, just because the US withdrawals, they don't have to.  If the US sanctions their companies, there will be full scale retaliation against us.  Europe has already warned regarding the recent US energy sanctions on Russia, that the US was not sovereign in Europe and could not sanction European companies.  

From what it looks, the President has decided that he wants to fight everyone in the world, at the same time. He seems to have no sense of the limits of our power. 

And, ironically, he is going to push Russia, Europe, and China into the same bed on this one. 

This is going to turn out good.

Herdee's picture

Less oil going to the west means less recycling of american dollars. More pipelines going to China.

Dominus Ludificatio's picture

These stupid tactics by team USSA , to isolate and suffocate others will come back to bite them in a hard way. They will be the ones who become a poor lonely island. Trump will have his own version of "What Happened?".