Iranian Oil Sanctions and Impacts to Global Oil Markets

It would be hard for even the most casual market observer to miss the wild ride the price of crude oil has been on lately. It would be harder to get a holistic understanding of what is driving these wild price swings, and certainly impossible to cover in a blog post.  One undeniable component helping drive pricing behavior is the Iranian oil export sanctions the Trump administration has quasi-imposed on the Iranian regime. The Trump administration’s do-si-do dance with their own sanctions is further evidence that even the Trump administration hews closely to the consensus view that the price of fuel is a major determinant of macroeconomic growth. Both domestically, internationally, and for the global trade that underpins the whole system.

The international nature of the oil market is an important point to reiterate, as the major oil development in the last decade (U.S. domestic shale production), should seemingly reduce the need for global considerations in American energy policy decisions. That the market-effects of sanction policies would be so strong that they end up helping drive their policy formulation again reinforces both the macroeconomic significance and global nature of oil markets. It is also indicative of how powerful a tool American sanctions can be for a market that is heavily integrated within the U.S. financial system.

Brent Historical Price per Barrel – Trailing 12 month

In May of 2018, President Trump announced his intent to withdraw from the Iranian nuclear deal and reimpose sanctions, one of which aimed to reduce Iranian oil exports to zero. I would be remiss to omit the Venezuelan production meltdown happening in parallel, but the following summer saw a relatively steady surge in the price of oil to over $80 per barrel. As concerns rose regarding prices marching to $100 per barrel (becoming a drag on economic growth), President Trump began tweeting the Saudi’s to pump more oil, but also quietly granted eight 180-day oil-import waivers for countries to continue importing Iranian oil on November 4th 2018.

Six months later (April 2019), as oil prices largely stabilized, the Trump administration announced the end of the oil waivers. Prior to April, the eight oil-exempt countries imported a combined 1.6 million barrels per day from Iran. As of May, that volume has essentially dropped to zero. On May 31st, the WSJ reported that the Trump administration was delaying the planned implementation of additional Iranian petrochemical sanctions. This came one week after the United States publicly identified Iran as the culprit behind damage four vessels sustained near the Strait of Hormuz. It would appear that the economic leverage (soft power) finally solicited a kinetic response from Iran. It remains to be seen how the market responds to the introduction of physical geopolitical risk into the market. Up to this point, geopolitical risk could be seen more as baked into market pricing in a more speculative manner.

Iranian Crude Oil Exports (barrels/day) – Trailing 5 year

That near-universal international adherence to a sanctions policy that has been confusing, and at times even contradictory, is evidence of the strength the U.S. financial system plays in global trade. Simply hinting at sanctions has proven strong enough to move market-supply decisions and it is interesting to note that even at an arguable low-point in America’s international trade reputation, it is still getting 100% compliance from India, China & the EU. The sobering strength of U.S. financial sanctions is not lost on the international trading community. The EU is currently developing a system called Instex that will allow for international trade with Iran that bypasses the use of the U.S. dollar to underpin the transaction. India and China are also in development of similar mechanisms.

-Andrew Kochanski