Could Iran sanctions see Brent spike to U.S.$100 a barrel?

After the implementation of the nuclear deal in January 2016, Iranian production and exports recovered to pre-sanctions levels inside six months. Exports reached a peak of 2.8 million barrels per day in April 2018, including 300,000 barrels per day of condensate. Buyers have come from numerous countries, with the bulk sold into Asia, the Mediterranean and Northwest Europe.

Since the U.S. withdrew from the nuclear deal in May 2018, Iranian crude and condensate exports fell to around 1.8 million in September on our estimates. South Korea, a big customer, has cut all imports since August. European buyers are winding down – France stopped in July, Italy, Spain and Greece follow this month. Beyond November 5, we expect crude exports to fall to 1 million barrels per day, though it could vary month to month; and condensate to 100,000 barrels per day. Crude sales will be concentrated around a core of supportive state buyers, China, India and Turkey.

It will be difficult for Iran to maximize exports when virtually all trade in oil is cleared in U.S. dollars, putting international oil companies, many national oil companies, traders and banks off limits. Crude exports contribute one-third of government revenues so there’s a huge incentive for Iran to use every conceivable lever.

We’ve seen Iranian crudes discounted by U.S.$1 per barrel compared with similar Middle East grades, the biggest for a decade. Iran is hoping the EU’s barter proposal – goods as indirect payment for oil – opens doors, though we doubt any big oil traders will leap at the opportunity. Access to shipping insurance is also a problem, though Iran has its own fleet of 60 tankers and has offered cargoes CIF (cost, insurance and freight) to buyers. Specialized tanker trackers suggest Iranian tankers are operating ghost with disabled ID systems to avoid detection.

Condensate is very important to the story. Iran’s production is around 750,000 barrels per day, big in global terms, with about half exported. The condensate is produced in association with gas needed for the domestic market so can’t be shut-in like oil. During the 2012-2015 sanctions, Iran increased condensate sales to cushion the impact of lost oil exports. It’s not clear they’ll have the same flexibility under the new sanctions. South Korea, the biggest buyer, and the United Arab Emirates, have now stopped condensate imports.