Editor's Note: Below is a complimentary research note by Hedgeye Energy Policy analyst Joe McMonigle. If you would like access to his institutional research email firstname.lastname@example.org.
The Trump Administration is likely to renew waivers of US sanctions on Iran oil sales at the upcoming May 4 deadline, according to our analysis of the issue and current policy priorities of the Administration.
We do not see much dissent in the Administration over waivers or the Iran policy generally. Everyone, including President Trump, would like to see exports go to zero. But Trump and his economic team are also focused on oil prices, especially the headline Brent price.
From a sanctions standpoint, Venezuela seems to be a higher policy priority of the Administration. Declines in Venezuela production are adding pressure to oil and gasoline prices - just as the US is about to head into the high demand summer driving season.
In our view, there is also a growing recognition in the Administration that the Saudis are unlikely to come to the rescue with more production to offset prices - absent some supply crisis.
We think Brent prices will be hovering over $70 soon as we approach the May extension deadline and will be generating the oil price headlines that aggravate Trump and generate anti-OPEC tweets.
We believe waiver renewals are already priced into the market, and therefore any change in policy would be a surprise to the market and only help to overheat already rising oil prices.
Therefore, we have a high degree of confidence that waivers will be extended for at least for the five countries utilizing them now: China, India, Turkey, Japan and South Korea. However, we also think imports from these five countries will be further reduced in exchange for the waiver. Iran exports in March are about 1 million barrels per day (b/d). As a result of the waiver renewals, we forecast a further decline in Iran exports to about 800,000 b/d.
So while the press headlines will likely be about waiver renewals, Iran exports will be further reduced in the second half of 2019.
For all the handwringing about waivers, the Administration has been very successful. They've cut Iran exports in half since the announcement of sanctions last May and got China and India to reduce imports in return for the waiver. Most observers, and even the Iranians, last year thought India and China would not abide by US sanctions and thus provide a big loophole in implementation. Instead, the waivers announced in early November were a big win for the Administration in terms of reducing Iran’s oil exports and revenues.
However, we don’t see these Iran waivers as permanent and think the next renewal deadline in November will be the first time the Administration seriously considers allowing them to expire.