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‘The Bullish Conclusion Is Simple’: Analysts Quickly Adapt To Oil’s New Reality As Japan To Stop Importing Iranian Oil In September

"This could leave the oil markets vulnerable to even minor output disruptions."

Late last month, the U.S. asked Japan to stop shipments of Iranian crude as part of a broader effort to compel allies to turn the screws on Tehran following Donald Trump’s decision to exit the nuclear deal.

As Bloomberg noted at the time, Japan is “Asia’s fourth-largest buyer of Iranian supplies, received 5.3% of its oil requirements from Iran, or 172,000 barrels a day, in 2017.”

During the week of the OPEC meeting in Vienna, Iran’s oil minister Bijan Zangeneh said Japan had not stopped buying Iranian crude despite U.S. pressure. A decision from Japan was seen as likely by August.

Well, fast forward a couple of weeks and it looks like Japan is going to stop shipments first and ask questions about waivers later. According to sources cited by Bloomberg on Monday, cargoes loaded in September will be the last shipments in the absence of a waiver from Washington.

The sources, who spoke on a condition of anonymity, said that if Japan were to receive waivers, shipments could resume with December-loading cargoes.

This underscores the notion that Trump is likely to succeed when it comes to compelling (i.e., bullying) at least some of America’s allies to stop taking shipments from Iran, but when it comes to Japan, remember that Shinzo Abe has been especially keen to curry favor with Trump, going so far as to make actual hats that read “Donald and Shinzo make alliance even greater”:


So I would argue this was an easy one. Bloomberg previously reported that Japan would probably “take into consideration responses of nations including China, India and South Korea, where the share of Iranian crude in imports is higher.”

Last week, South Korean officials indicated they’re still waiting for word from Trump on whether the country’s refiners will be permitted to keep importing Iranian oil for the duration of the 180-day interim period. That, amid reports the country had stopped buying for the first time in six years.

“The move [to not lift any Iranian crude and condensate in July] by South Korea, one of Iran’s main customers in Asia along with China and Japan, comes as it is in talks to seek an exemption from U.S. curbs on buying Iranian oil, in line with a waiver it received during previous sanctions,” Reuters noted. Iranian media would later deny that reporting, citing South Korea’s Embassy in Tehran.

The supply worries are of course putting upward pressure on prices, even as Trump attempts to convince the Saudis to make up any potential shortfall. For their part, BofAML sees prices hitting $120/bbl if Trump sticks to a “zero tolerance” policy on Iranian crude.

Between the Iran situation and Venezuela’s trials and tribulations, supply jitters are outweighing the impact of the OPEC deal, both in investors’ minds and mechanically.

“Remember that the 1 Mb/d increase is making up for months of Venezuelan declines, so in that sense, it is just an offset”, SocGen’s Michael Wittner writes, in a new note, adding that “Venezuela has been recently experiencing huge logistical issues which have disrupted exports much more than production with July arrivals of Venezuelan crude in Asia expected to decline by 0.5 Mb/d vs. May.”


(SocGen’s “Oil Market Scorecard” as of July 8)

Because nearly three quarters of Saudi exports are bound for Asia, Saudi volumes “will be almost directly replacing Venezuelan barrels”, Wittner goes on to say, before delivering the following assessment of what the likely ramifications of Trump’s hardline approach on Iran will be:

Without going into the details here, based on the harder US position, as well as indications from European and Asian importers, we are significantly increasing our estimate of the impact on Iranian production and exports. Previously, we projected that Iranian exports could be reduced by 0.4-0.5 Mb/d, as a result of US sanctions. Now, we forecast that Iranian exports will be cut by 1.0 -1.3 Mb/d. Iranian production and exports have only been trimmed by around 100 kb/d in the last couple of month versus previous levels (not counting a surge in April). That means most of the cut is yet to come. With spare capacity expected to be in the 1.0 -1.5 Mb/d range by the end of July, the bullish conclusion is simple: if the Saudis and others need to increase output to make up for the forthcoming cuts in flows from Iran, there is barely enough spare capacity to do the job. After replacing Iranian volumes, there will be essentially no spare capacity left. This would be extremely bullish, and leave the oil markets vulnerable to even minor output disruptions.

And so, I suppose we can look for more exasperated tweets from Donald Trump and more frustrated calls to Riyadh as he tries to wrap his head around the idea that it might not be possible to completely offset the impact of lost Iranian barrels, meaning rising prices at the pump might be something U.S. consumers have to live with.

If that imperils the MAGA “miracle”, well then so be it.




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