As we learn more details regarding the State Department’s deals with eight countries receiving “temporary allotments,” it has now become clear in our view that the Administration’s plan will result in cuts to Iran oil exports of about 1.3 million barrels per day (b/d) as early as January.
On Monday, Secretary of State Mike Pompeo announced a list of eight countries that received what he called “temporary allotments” with extra time to get compliance to zero imports. The countries are: China, India, Turkey, Japan, South Korea, Greece, Italy and Taiwan.
The State Department has declined to release details of the bilateral agreements with the eight countries citing confidentiality concerns. But we’ve had a few days to gather more information regarding the deals, and some other details have emerged in press reports. Here is the latest key information on the deals:
1) The eight countries have agreed to reduce exports by at least 20 percent and be on a path to zero by April 1.
2) Three of the eight countries (we believe Greece, Italy and Taiwan) will go to zero imports on January 1, according to a State Department briefing and other reporting we have done. These extensions were granted to provide flexibility to accommodate contract obligations until the end of the year.
3) As of November 5, the State Department asserts “over the last six months we have taken at least one million barrels of Iranian oil off the market.” We are told that the State Department further estimates that Iran exports will be reduced by 1.4 million b/d with the accommodations to the eight countries. (This comports with our forecast model for January.)
4) China has agreed to limit Iran imports to 360,000 b/d, according to a Reuters report. This amount is a much greater cut to China’s imports from Iran than the general 20 percent reduction requirement.
5) South Korea has agreed to limit Iran imports of condensate to 4 million b/d, according to an S&P Platts Oil report - again a much larger cut than the 20 percent reduction requirement.
As we said previous notes, we think that getting China, India and Turkey to reduce imports now in exchange for the deadline extension is significant and a clever move by the administration. That’s because almost no one expected any of the three nations to comply with sanctions.
Based on the emerging details on the deals with the eight countries, we have modeled new forecasts for Iran exports in November and January. Our forecast model for November has Iran exports at 1.315 million b/d, which would be a cut of 1.1 million b/d from May. The forecast model for January has Iran exports even lower at 1.075 million b/d which translates into a cut of 1.3 million b/d and is in line with what we are told is the State Department estimate once the accommodations are in effect.
If China, Turkey and India also agreed to eventually go to zero, it is a very big deal. While the State Department has suggested all the countries receiving accommodations will be expected to be on a path to zero imports, we have been unable to confirm these additional details.
Therefore, it is possible that Iran exports decrease further after January if the accommodated countries begin on the path to zero. Brian Hook, the State Department’s top official for Iran sanctions, confirmed at press briefing this week “there will be further reductions.” We believe him but until we have more details, we are unable to model past the January number.
One last note: Reuters also reported that its sources in China said it expects to receive another extension of its accommodation in April in return for further reducing Iran imports to 220,000 b/d. Our sources tell us that the eight are expected to get to zero during the extension expiring in April and no further extensions are in the cards.
However, we think China is a special situation. In our view, China likely never plans to go to zero imports, and no one in the US government believes it either. We are a long way from April but if the US can get China to further reduce imports to 220,000 b/d, it would represent a cut of 530,000 b/d and be a huge diplomatic victory for the administration.