How the US decision will affect oil markets globally

Six months after the US rocked oil markets by letting Iranian exports continue, its decision to end sanctions waivers that allowed shipments is also set to reverberate across the globe.

It marks a change in direction from November last year, when the Donald Trump administration granted waivers to eight importers as it sought to temper fuel prices ahead of American mid-term elections.

The move threatens to squeeze supplies further in a market that’s already facing supply disruptions from Venezuela to Libya and Nigeria, and extend this year’s rally in global benchmark Brent crude above $70 a barrel.

Prices are still below the four-year highs of over $86 they hit in October before the US issued its waivers.

Here are some of the potential implications of the Trump administrations latest decision, which is aimed at piling economic pressure on Iran over the Persian Gulf state’s nuclear program by cutting off a key source of the OPEC member’s revenue.

Fate of OPEC+ deal

The US government will also announce that it got commitments from suppliers such as Saudi Arabia and the United Arab Emirates to offset the loss of Iranian crude, according to people with knowledge of the matter.

That could jeopardise the output deal between the Organization of Petroleum Exporting Countries and its allies, which have been curbing supplies since the start of the year to avert a glut. Russia, one of the partners in the pact, has already signalled that the cuts may not need to be extended. A decision is expected when the producer group known as OPEC+ meets in June.

The pact was driven by Saudi Arabia after it was blindsided last year by the US decision to grant waivers, which sparked a collapse in crude into a bear market in the fourth quarter. Now, the American pledge to eliminate oil exports from Iran may provide an incentive for Crown Prince Mohammed Bin Salman — a Trump ally — to ease the kingdom’s policy.

Price relief?

While crude has jumped more than 3 per cent on the news that the US won’t renew exemptions, the future direction of prices may be determined by how much the likes of Saudi Arabia and the UAE. are able to cushion the blow amid other supply disruptions.

Last year, prices jumped to over $86 a barrel even though Saudi Arabia was pumping at record levels. Now, its not just Iranian shipments that are disrupted. Separate US sanctions on Venezuela have squeezed supplies from that OPEC producer too, while fellow group member Libya is roiled by violence. Just on Sunday, a key oil pipeline in Nigeria was halted after a fire.

Iran’s exports in March totalled about 1.3 million barrels a day, tanker-tracking data compiled by Bloomberg show. Shipments were as high as 2.5 million barrels daily in April last year, before the US announced plans to reimpose sanctions on the Islamic Republic.

Pain for buyers

Of the buyers, India, South Korea, China and Japan are likely to be the hardest hit. If crude prices go higher, the budget deficit in import-dependent nations may also worsen and inflation could accelerate.

The biggest importers had already put purchases from the Persian Gulf state on hold as they waited for the US decision.

South Korea’s Hanwha Total Petrochemical Co. has already been buying and testing alternative cargoes from areas such as Africa and Australia. While its not impossible to find other options, that would raise costs and could affect the company’s profits, according to a spokesman.

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