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Takeaway: Latest Update on Waivers Talk. No changes in our forecast to expect tough sanctions impacting 1mbd in Iran exports.

Editor's Note: This is a complimentary excerpt from an institutional research note from our Senior Energy Policy analyst Joe McMonigle.

5-Day Countdown to US Sanctions on Iran Oil  - z hedgeye trump

The US sanctions on Iran oil sales starts in 5 days on November 4, 2018. The Trump Administration continues to plan tough implementation of US sanctions with a goal to reduce Iran crude exports to zero.

Nothing we have learned in recent days has changed our assessment that the market should expect a strict policy with little or no exceptions. As a result, we maintain our forecast that global markets will see a reduction in Iran crude exports of at least 1 million barrels per day (b/d). 

Since our last note a week ago, there have been additional press reports of potential US waivers for India, Japan and South Korea as well as another report describing a split in US strategy between some State Department officials who favor waivers and National Security Advisor John Bolton who wants a tough, no exceptions policy. 

Biggest Proponent of Tough Iran Policy – President Trump Himself 

While we don’t doubt the accuracy of these reports that are based on comments by sources in the administration, we do think they are missing a main central point: the biggest proponent of a tough Iran policy is President Trump himself. 

At each step along the way, foreign policy and market experts have doubted Trump or suggested he would take a weaker policy option (mainly to avoid high oil and gasoline prices). But each time Trump has remained consistent on his Iran policy and followed through on every promise to date. 

With Trump leading the tough Iran policy, the report on the Bolton vs. State Department split is not so important. We get that it is a news story, but for investors the big picture has not changed.   

The Latest on Waivers 

Here is our latest assessment on the continued reports about waivers for India and now Japan and South Korea. First, no decision about exemptions has been made; and second, if there will be exceptions, it won’t be called a waiver but instead a very short grace period for unique circumstances. The message remains that the US government expects imports of Iran crude to be zero. 

India’s request for a US waiver is a big deal because it is likely the difference between US sanctions displacing 1 million b/d or closer to 1.5 million b/d of Iran crude exports. The State Department is politely listening but is trying to focus India on finding alternative sources of oil.  Some of India’s refiners have already halted purchases of Iranian oil while others have gambled by scheduling deliveries in November after sanctions go into effect. If there are to be “waivers,” we expect them to be for a limited grace period of no more than a month or two in order to get imports to zero. 

Catalyst for Higher Prices 

Saudi Arabia and other producers have delivered on their promise to add supply ahead of the US mid-term election.  But after the election, we see these producers taking their foot off the gas pedal on the supply boosts from September and October.  We have already seen comments from the Saudi oil ministry officials and other OPEC members warning of rising inventories in the fourth quarter and 2019. 

We believe a combination of factors will lead to higher prices in the $85 range by December:  greater amount than expected of displaced barrels from Iran sanctions; the end of the bigger-than-normal US refinery maintenance season; post-election production reductions from Saudi & Gulf producers; and headline risks leading up to the December 6 OPEC meeting that currently look to rollover the production cut deal into 2019.

5-Day Countdown to US Sanctions on Iran Oil  - zcha1

5-Day Countdown to US Sanctions on Iran Oil  - zcha2