The US Plan to 'Cut Iran's Oil Exports' and Its Impact on Foreign Revenues

While the International Energy Agency expected Iran's oil exports to decrease by 900,000 barrels per day due to US sanctions by the end of next year, reports of the US request for a complete halt to oil purchases from Iran by Asian customers have put Tehran in a complicated situation. During the previous round of sanctions in 2012, Iran's oil customers were exempted from sanctions by reducing their purchases by 20% every six months, but the Trump administration is much stricter than Obama’s. Earlier this year, before the US withdrew from the JCPOA, the International Monetary Fund reported that the value of Iran's oil and petroleum product exports last year was estimated at $63.7 billion, predicting it would reach $78.3 billion in 2018, which was supposed to account for over 60% of the country's total exports. However, if Asian and European buyers withdraw from purchasing Iranian oil, Tehran's oil revenues will effectively cease in the second half of this solar year. According to international statistics, Iran's average exports in the first half of this year are almost equal to last year's figures. Bijan Namdar Zangeneh, Iran's oil minister, announced last week at the OPEC meeting that in June, Iran's daily oil and gas condensate exports reached 2.5 million barrels, a decrease of 200,000 barrels from the previous month. Mohammad Baqer Nobakht, the Iranian government spokesman, also announced that for the past three months, a daily sale of 2.41 million barrels of oil was forecasted, but fortunately, about 2.8 million barrels were sold, with a price forecast of $55 per barrel, while each barrel was sold for about $65. However, this situation is likely to last only for another month, and after August, Iran's customers may not be able to receive oil, as the shipments purchased in August will arrive at their ports in September, and Iran also gives its customers two months to transfer the oil payment. Thus, the last payment for Iranian oil shipments purchased in August could effectively be made in November, coinciding with the implementation of US sanctions. Nevertheless, statistics indicate that imports of Iranian oil by its customers have already decreased, and even Bijan Namdar Zangeneh announced last week that the French company Total and Royal Dutch Shell have completely stopped purchasing oil from Iran. In 2017, Iran exported 2.125 million barrels of crude oil and about 400,000 barrels of gas condensate daily, with about one-third of these shipments going to Europe and the rest to Iranian customers in Asia, including China, India, South Korea, and Japan. These figures have remained approximately the same for the first half of this year. Following the announcement of the US request for its customers to completely halt oil purchases until November 4, the price of Brent crude oil increased by more than 2%. Brent crude is currently trading at $76.29, and US oil, which has risen by more than 3.4%, is priced at $70.22 per barrel. A sudden halt to Iran's oil exports will likely disrupt the market. According to international assessments, even if OPEC does not increase its production, global oil consumption will increase by 1.63 million barrels per day this year, with non-OPEC countries producing 100,000 barrels more than this amount. Meanwhile, OPEC and its allied countries, led by Russia, agreed last week to increase their compliance with production cuts to 100%. Currently, the compliance rate of these 24 countries with the 2016 oil production cut agreement is about 152%, meaning these countries need to increase their production by another million barrels per day. Iran argues that the agreement to increase production means that countries that have reduced excessively should increase their production, and for example, Saudi Arabia should not compensate for Venezuela's production decline. However, statements from Russian and Saudi officials indicate that these countries are preparing to increase production. The Russian energy minister announced on July 3 that the country will add 170,000 barrels per day to its production this year. Saudi Arabia also claims that the OPEC agreement will add 600,000 to 700,000 barrels more to the market daily. Given these figures, in practice, OPEC and non-OPEC countries cannot fully compensate for the cut in Iran's oil production. Another problem is that Iran produces various types of oil, the most important of which are heavy and medium-heavy oils. This type of oil, which has a significant share of Iran's total production, is very similar to oil from West Africa, the Ural region of Russia, and southern Iraq. If these countries cannot compensate for the cut in Iran's exports, buyer countries will have to make changes in their refineries to receive another type of oil.