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The Iran Sanctions: Who’s Exempt And What’s In Store For Oil Prices

The big question.

Ok, so the U.S. is going to grant waivers for eight countries when it comes to Iranian oil imports.

Those exemptions are temporary and will apparently include Japan, India and South Korea, who will be permitted to keep buying crude from Tehran after the U.S. reimposes sanctions at 11:59 PM on Sunday.

According to sources who spoke to Bloomberg, China is on the exemptions list as well, although discussions are ongoing. That’s probably a good thing, considering Beijing wasn’t going to comply anyway. It’s also possible that Turkey could secure an exemption.

Crude is of course caught in a perpetual push-pull dynamic. On the bearish side, there are concerns about global demand amid decelerating growth and rising U.S. crude stockpiles. On the bullish side, folks are fretting over lost Iranian barrels due to the reimposition of U.S. sanctions and the prospect that if the Saudis boost production to offset those lost barrels, spare capacity will be diminished, leaving the market vulnerable to other supply disruptions. Obviously, the bearish arguments won in October, as crude plunged.

That tug of war is nothing new – it’s been going on all year long and that’s the backdrop against which the reimposition of the Iran sanctions is set. News that some countries will be exempted (at least initially) argues for softer prices in the near-term.

On Friday, Mike Pompeo delivered some details on the expected waivers, noting that Europe will not be exempted. That’s no surprise. You might recall that over the summer, Pompeo and Mnuchin made it clear to America’s European allies that exemptions for them weren’t in the cards.

Trump ratcheted up the adversarial rhetoric towards Iran at the U.N. in September and used his exceedingly bizarre General Assembly speech to accuse OPEC of “ripping off the world”, a readily apparent attempt to serve notice that he expects the Saudis to keep prices low once the Iran sanctions are reimposed.

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As far as the outlook for crude going forward, it’s worth noting that Goldman is sticking with an $80 year-end Brent target. In a note dated October 31, the bank explained the October rout before outlining why they still expect the market to be in a deficit going forward. To wit:

What to make then of the recent inventory builds and shift of the Brent forward curve back into contango? We believe this is a repeat of the July market sell-off with a ramp-up in Saudi production occurring at the same time as an increase in US exports (and pick-up in Libyan volumes). The magnitude of the sell-off, its velocity and the dramatic weakening in front-month timespreads are also likely once again due to the large trading footprint of CTAs, especially as prices breached technical levels. With October high-frequency oil inventory data pointing to a slowdown in stockbuilds globally and Iran production still set to fall, we believe that the market will end up in a deficit in November, setting the stage for a recovery in both Brent flat prices and timespreads. In particular, our expectation for a modest deficit in 4Q18 and our timespread to inventory modeling points to Brent 1-mo vs. 12-mo timespreads as being too discounted today.

Again, that was on October 31. What does Goldman expect in light of the exemptions news? Well, nothing much, actually.

“While consistent with our expectations, the granting of waivers does not imply that Iran exports will stabilize near current levels [and] as a result, we still expect that the global oil market will be in deficit in 4Q18”, the bank’s Damien Courvalin writes, adding that Goldman expects steeper backwardation to “drive spot prices higher to our year-end $80/bbl forecast, with low positioning also pointing to price upside in the short-term.”

Here’s a snapshot of Goldman’s expectations for Iran’s oil exports going forward:



Ok, so what does everyone else think? That depends on who you ask. UBS sees Brent going back to $85 over the next several weeks, for instance.

Barclays, meanwhile, has a pretty nuanced take on things. “New fundamental data increase our conviction from early October for our out-of-consensus $77/b Brent view in Q4 and for a range-bound market in the medium term”, the bank writes, in a note dated Friday. Here’s a bit more color (and this is from their latest Blue Drum report, which are veritable tomes, so just know that this is but a tiny excerpt from a much longer piece):

Although the price decline seems counterintuitive as concerns about Iran and Venezuela mount, market sentiment has shifted markedly from just one month ago, in line with our view. Brent prices have averaged $80/b this quarter, and we think the average is on its way lower. New fundamental data increase our conviction from early October for our out-of-consensus $77/b Brent view in Q4 and for a range-bound market in the medium term. We are not changing our view, but flag that the risk is still skewed to the upside. If the Saudis aspire to $90 because of recent events and if Nigerian or Venezuelan output falls more than we assume, then we could be back above $80/b sometime next year. Yet the oil market is entering a new era, with the key movers and shakers enjoying significantly more degrees of freedom than they have in the past.


For their part, Credit Suisse notes that while “seasonal stock builds and assurances by OPEC/Russia to lift supply if necessary helped cool the market at the start of Q4, uncertainty remains high and spare capacity is set to shrink, warranting a higher risk premium and volatility.” In other words: Prices should get some support from here.

What you should also note is that once the midterms are out of the way, Donald Trump has less incentive to scream (literally, in the case of his all-caps OPEC tweets) about higher prices.

It’s been clear since Trump pulled the U.S. out of the Iran deal that the President is concerned about the prospect of rising prices at the pump eating away at the gains expected to accrue to U.S. consumers from the tax cuts. Assuming he doesn’t actually care whether Americans have more money or not outside of the political points he can score before the midterms, it’s likely that he’ll be willing to stomach higher crude prices from here if it means turning the screws on Tehran – especially given the cushion he now has thanks to the October selloff in oil.

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So, place your bets accordingly, but do note that from a kind of 30,000 foot perspective, geopolitical uncertainty is high and common sense dictates that the oil market should be pricing in a commensurate premium in line with that heightened uncertainty. That is of course unless Trump manages to plunge the world into a devastating depression with his “greatest” tariffs, in which case across-the-board demand destruction will ensue (I’m just kidding, but it’s funny).

Finally, do note that if Trump is forced by U.S. lawmakers to impose sanctions on the Saudis as punishment for the Jamal Khashoggi murder, it’s possible that Riyadh will be less receptive to the President’s demands that the Kingdom tap their spare capacity to keep prices lower.

Meanwhile, Trump made an actual Game Of Thrones poster of himself and posted it on Twitter…



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