Who are the winners and losers from US oil sanctions on Iran?
It seems clear that all producers will benefit from rising prices following the decision of US president Donald Trump this week to impose sanctions on Iranian oil exports within 180 days. Conversely, it would be reasonable to expect that consuming nations will suffer from high oil prices.
But in reality things could be different depending on the development of events. Not all oil producers will benefit in the same way and not all consumers will be affected in the same way. Similarly, not all international oil companies will benefit or lose in the same way.
So who are the real winners from the renewed sanctions on Iranian oil and who are the losers? And why are the sanctions this time different from the last round of sanctions that were imposed in the summer of 2012?
Starting with the second question, the dynamics in the market differ greatly from the previous situation. In 2012, demand was not very strong and there was no excess supply in the market to replace Iranian crude.
Iran mainly produces medium and heavy-density crude oil with a high sulfur content, otherwise known as sour crude. Not all producers can supply this type of crude, and most of the medium and heavy excess capacity is in the Gulf region, in countries such as Saudi Arabia and Iraq.
The growth in world oil demand in 2012 was about 800,000 barrels per day (bpd), largely unchanged on the previous year, as US oil demand moved from deep contraction to minor growth, according to OPEC estimates at the time.
The supply picture was different, with output from outside the group not growing greatly, despite oil prices trading at above $100 that year. Non-OPEC’s supply growth was projected at 500,000 bpd in 2012 with gains from US and Canada, according to the organization’s estimates. OPEC at that time had a production ceiling of 30 million bpd.
The supply and demand situation in 2012 was reflected in pricing dynamics. Due to the lack of enough medium and heavy spare capacity, the gap in prices between Dubai crude oil, which represents Gulf heavy sour grades, and Brent oil, which represents medium-sweet grades, narrowed to record lows in that year following the embargo on Iranian shipments. This was because the value of medium and heavy grades went up due to scarcity.
The price spread between Brent and WTI widened greatly, as the US was not exporting crude oil and most shipments to Asia came from Brent-linked crude grades or Brent itself. By the end of 2012, the Brent-WTI spread reached $24.
Today, the dynamics of the market are totally different. Fundamentals are healthy and there is abundant crude in the market — mainly sweet and light oil. This time around, it is not hard to replace an Iranian shipment, even from within OPEC, as many countries — including Iraq, Saudi Arabia, Kuwait and the UAE — have invested in adding capacity.
According to OPEC’s latest monthly report, oil demand in 2018 might grow by 1.63 million bpd, twice the amount in 2012. Growth in supply from outside OPEC this year is around 1.71 million bpd, more than three times that in 2012.
US oil companies will benefit more than OPEC producers, while refiners in Asia and Europe will suffer
Meanwhile the Dubai-Brent spread, which now stands at $4 per barrel, is expected to narrow later in the year and early in 2019, as the value of Dubai might rise. As for the Brent-WTI spread, the former is trading now at a premium of $6 to WTI.
The only significant difference is that OPEC and some non-OPEC producers have an agreement to cut production as oil prices now trade at little more than half their levels in 2012. If the sanctions on Iranian crude result in the end of that agreement, there will be a flood of medium and heavy grades in the market and any sanctions on Iranian crude will not affect the balance of the market.
Saudi Arabia alone can increase production by another 500,000 to 1 million bpd in a short period. But this is unlikely, given the Kingdom’s close coordinations since last year with Russia and others to balance the market; therefore the responsibility for increasing supply is likely to be shared by a wide group of producers.
It is hard to tell whether the new sanctions will spell the end of the OPEC plus agreement. Oil prices are not yet at the level where producers in the agreement want them to be, as they are not yet high enough to bring back lost investments in the industry. So the deal might continue but with a new distribution of the quotas of producers.
Another important difference with the situation in 2012 is that the US now has enough capacity to replace Iranian condensates to Asia due to the increased production of shale oil and gas from areas such as the Permian and Eagle Ford. Back in 2012, it was hard to replace Iranian condensates — a form of a very light oil.
With all of this in mind, who will be the winners and losers from the new sanctions on Iran? US oil companies are in a better position to benefit more than OPEC countries, while refiners in Asia and Europe will suffer when they look for new sources of supply. This is for two reasons.
First, such refiners will need to get some oil that is priced based on Brent. Second, some refiners will lose the discounts and the long billing cycles that Iran usually offers to its customers to compete with other Gulf producers.
Another source of concern for refiners is the refining margin. The shift in use of other type of crudes that are not configured by the refineries will change the economics, and may shrink the profits made from refining each barrel. For the US refiners, there is not much to fear. But for EU and Asian refiners the margins will be a big concern next year.
OPEC will no doubt think about these issues in its next ministerial meeting in June but there are many challenges. First, distributing Iranian market share is not going to be easy, and selling crude at reasonable discounts and pricing to Iran’s customers is a delicate marketing issue.
Second, whenever there is a void in the market, everyone will try to sell more crude. This may result in cheating by some members of the agreement.
What is almost certain is that OPEC and non-OPEC allies are interested in keeping the agreement because it results in higher oil prices. And as oil prices are expected to increase next year, although not greatly, producers will need to balance the market and make sure they do not jeopardize the balance of the market.
But will the sanctions work this time? This really depends on the role that the EU plays. Last time it was not the embargo that hurt Iranian oil exports but the withdrawal of EU insurers from insuring Iranian tankers that made customers unwilling to buy Iranian oil.
• Wael Mahdi is an energy reporter specializing on OPEC and a co-author of “OPEC in a Shale Oil World: Where to Next?” Twitter @waelmahdi