With oil prices already extending the drop from their highs as the trader "panic attack" identified by celebrated energy analyst Art Berman abates, and approaching a bear market from recent highs, a Friday morning report from Bloomberg will likely ensure that prices continue to move lower.
According to an anonymous "senior administration official", the US will soon approve waivers for eight countries, including Japan, India and South Korea, that will allow them to continue buying Iranian crude oil even after sanctions are reimposed on Monday. China is also believed to be in talks to secure a waiver, while the other four countries weren't identified. The waivers are part of a bargain for continued import cuts, which the administration hopes will lead to lower oil prices. Secretary of State Mike Pompeo is expected to announce the exemptions on Friday.
Speculation that waivers could be forthcoming had been brewing for some time, and has been one of the factors driving oil prices lower in recent weeks. Pompeo has acknowledged that waivers were being considered for countries who insist that they depend on Iranian supplies, while adding that "it is our expectation that the purchases of Iranian crude oil will go to zero from every country or sanctions will be imposed." Assuming the US does follow through with the waivers, it's expected that they would be temporary, and the US would expect that the recipients would continue to wean themselves off Iranian crude. The administration will also reportedly ask that these countries reduce their trade in non-energy goods.
It's believed that Turkey, another major importer of Iranian crude, may be one of the four working on an exemption, according to Turkish Energy Minister Fatih Donmez told reporters in Ankara on Friday. Iran was Ankara’s biggest source of oil last year, accounting for more than 25% of Turkey’s daily average imports of around 830,000 barrels. The identities of the recipients are expected to be released on Monday as sanctions take effect.
Despite the international outcry over Trump's decision to withdraw from the Iran deal, the administration believes the sanctions are working. According to internal estimates, exports of Iranian crude have fallen to 1.6 million barrels a month, from 2.7 million barrels. That compares favorably to the 1.2 million barrels a month removed from the market under President Obama and the EU during the negotiations for the deal. Obama also extended waivers to 20 countries.
The administration’s decision to issue waivers to eight countries also marked a significant reduction from the Obama administration, which issued such exemptions to 20 countries over three years. During the previous round of sanctions, nations were expected to cut imports by about 20 percent during each 180-day review period to get another exemption.
And in order to ensure that oil money isn't used by Iran to finance terrorism, the US is reportedly developing an escrow system that will ensure that Iran can only spend its oil money on food, medicine and other crucial supplies.
Countries that get waivers under the revived sanctions must pay for the oil into escrow accounts in their local currency. That means the money won’t directly go to Iran, which can only use it to buy food, medicine or other non-sanctioned goods from its crude customers. The administration sees those accounts as an important way of limiting Iranian revenue and further constraining its economy.
"It’s a virtual certainty that Western banks are not going to violate the escrow restrictions," said Mark Dubowitz, the chief executive of the Washington-based Foundation for Defense of Democracies who has advised Pompeo. "The message they’re sending is don’t screw around with these escrow accounts and try to get cute."
Oil prices were little-changed following reports of the waivers, though it's possible the reaction could be delayed until Pompeo releases more details about the countries that will be granted the waivers, and the details of what the waivers will look like.
It's also possible that, since the killing of Jamal Khashoggi has thrown a wrench in the US's plans to enlist Saudi help to further pressure the Iranian energy industry, that the likelihood of waivers had already been priced in.