A month after the US re-imposed sanctions on Iran, European oil buyers say they still have no idea whether the region will be permitted to make proportional reductions in purchases from the Middle Eastern country, or have to halt trade altogether.
The total lack of clarity on the scale of the reductions sought by President Donald Trump’s administration has left several customers continuing to buy Iranian crude for now, but uncertain if they will have to completely stop buying by November, according to refiners and traders operating in the region. Trafigura Group Pte warned that the market impact could eventually be much bigger than many people are expecting.
“We don’t know yet what percentage reduction will be required by the US,” said David Fyfe, chief economist at trading house Gunvor Group Ltd. “That seed of doubt means a lot of players are just shying away, and the banks and insurance companies are nervous about this.”
When Trump re-imposed sanctions on Iran on May 8, he gave buyers of the country’s oil 180 days to reduce their purchases or be shut out of the US banking system. Since that initial announcement, several European refiners said they’ve received no indication from Washington or their own governments about what they should do next. The European Union sent a letter to the US Treasury on June 4 asking for exemptions from sanctions.
Three officials from southern European refiners, who asked not to be named because the information isn’t public, said they are continuing to buy Iranian crude now, but fear they’ll have to make an abrupt halt to purchases in the coming months.
Finding other supplies shouldn’t be a problem, but there’s still no clarity on how much companies will need, said one official. It’s even unclear who in the US government they should be speaking to, said another person.
It’s unlikely that European governments can do anything to shield companies from US sanctions, meaning the region’s refiners will have to stop buying Iranian crude completely, said a senior executive from a major trading house.
“I think it is still very much a fluid situation,” Trafigura’s chief economist Saad Rahim said at the S&P Global Platts Annual Global Crude Oil Summit in London last week. “If you take what they’ve said at face value then it is going to be much more substantial than people think, but there’s room for negotiation.”
Under the Obama administration’s sanctions on Iran’s oil exports from 2012 to 2016, its output was curbed by about 1mn bpd. Europe imposed a full embargo on the country’s crude, while the US offered to waive the restrictions for buyers in Asia if they voluntarily reduced their purchases by about 20%.
This time, European governments, which want to preserve the Iran nuclear accord that Trump abandoned, are telling companies they can still do business with the Islamic Republic, said one of the European refiners. Yet major oil companies, such as France’s Total SA, say ignoring the sanctions isn’t an option, because the risk of being shut out of the US banking system is too severe. European banks may eventually refuse to process transactions with Iran, which would effectively halt trade, said another refiner.
If Trump were to demand a similar 20% reduction from buyers of Iranian oil today, it would remove about 500,000 bpd from the market initially, and probably even more going into 2019, said Fyfe. Problems that are already emerging on the availability of freight insurance for Iranian cargoes suggest the impact will be “much higher than people are thinking right now,” said Rahim.
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