The US Administration decided to end exemptions from sanctions for countries still buying oil from Iran; and White House said waivers for China, India, Japan, South Korea and Turkey would expire in May, after which they could face US sanctions themselves.
This decision is intended to bring Iran's oil exports to zero, denying the government its main source of revenue; while Iran insisted the sanctions were illegal and that it had attached "no value or credibility" to the waivers.
Having surprised the market by giving out sanctions waivers in November, the Trump Administration surprised it again by refusing to extend any of them on May 2. The price spike reflects that Coup de Theatre. But once that knee-jerk reaction is over, what prices do will depend on how strongly the market believes Washington can deliver its promises.
Zero exports is a big change from recent months for Iran, which has been very resourceful in keeping exports higher that thought. Recently, it shipped more oil off the radar in tankers that had turned off their transponders than on the radar.
India and China are its leading customers and look unlikely to go to zero any time soon.
The White House said it had a deal with Riyadh and Abu Dhabi but Saudi Oil Minister Al Faleh stopped short of confirming that and said that the Kingdom and others—including both producers and consumers—would watch the market and keep it well supplied.
Moreover, oil is not as central to Iran’s economy as it is to that of other producers, but there is no doubt the sanctions are taking their toll. The problem is that the regime strongmen and insiders are not typically the first victims of measures like this.
Oil is a big supplier, but there is enough spare production capacity to replace it. For other producers the challenge will be to seize its market share without overcompensating for the disruption, which would put downward pressure on prices and thus come back to hurt them. This will require a good view on how much oil Iran actually manages to export.
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