***NOTE: The chart in this note has been updated to reflect new amount for South Korea. The big picture doesn't change: Iran exports are cut in November by 1.1 million b/d and in January by 1.3 million b/d. We think these numbers are conservative. The State Department has estimated that Iran exports will be cut by 1.4 million b/d.
Headlines about Trump Administration “waivers” for eight countries announced Monday has created a false narrative in oil markets that US sanctions are not a big bite into Iran’s oil exports. But we think a quick review of the State Department’s implementation plan shows the sanctions bite is indeed real.
It’s important to recognize at the start that these are not waivers or exceptions but rather deadline extensions for a few countries to get on a path to zero imports. The word waiver is a legal term in the law but the State Department is implementing it as a deadline extension.
On Monday, Secretary of State Mike Pompeo called the deals “temporary allotments” and announced the eight countries as China, India, Turkey, Japan, South Korea, Greece, Italy and Taiwan.
Our review of the deals with eight countries makes it clear to us that the Administration’s plan will result in cuts to Iran oil exports of nearly 1.3 million barrels per day (b/d) as early as January and pushing Iran’s exports to one million b/d (a drop from 2.4 million b/d in May).
Here is what we believe are the key details of the deals:
1) The eight countries have agreed to reduce exports by at least 20 percentand 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.
3) 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.
4) South Korea has agreed to limit Iran imports of condensate to 4 million barrels per month, according to an S&P Platts Oil report.
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.
As a result, 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. Therefore, it is likely that Iran exports decrease further after January if the accommodated countries begin on the path to zero.
As we have said in previous notes, we think China is a special situation. We noted a Reuters report that China expects to receive another extension of its accommodation in April in return for further reducing Iran imports to 220,000 b/d. We can’t confirm this report but it would not be surprising. 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 in imports of Iranian oil and be a huge diplomatic victory for the administration.