Iranian sanctions contribute to supply uncertainty
https://www.eia.gov/petroleum/weekly/ October 11, 2018
In the October 2018 update of its Short-Term Energy Outlook (STEO), the U.S. Energy Information Administration (EIA) increased the forecast spot price for Brent crude oil to $74 per barrel (b) in 2018 and to $75/b in 2019, up by $2/b and $1/b, respectively, from last month's forecast. EIA expects West Texas Intermediate (WTI) crude oil prices will average about $68/b in 2018 and $70/b in 2019 (Figure 1). The October STEO forecast reflects market responses to significant uncertainty about the effects of sanctions on Iran and the response members of the Organization of the Petroleum Exporting Countries (OPEC) and other countries might have.
The effects of the Iranian sanctions and the uncertainty of the response from crude oil producers are reflected in the 2018 fourth-quarter price forecast. EIA forecasts Brent crude oil prices to average $81/b in the fourth quarter of 2018, which is $5/b higher than was forecast in the September STEO. This increase reflects recent upward price movement as well as the possibility that crude oil prices could remain elevated while market participants assess how much Iranian crude oil production will decline in the coming months and the response of other oil producers. EIA forecasts WTI prices to increase at a slightly slower rate, which has led to a widening of the Brent-WTI spread to $9/b in October. EIA forecasts the spread to narrow to $4/b by December 2019.
On May 8, 2018, the United States announced that it would withdraw from the Joint Comprehensive Plan of Action (JCPOA) and would reinstate sanctions against Iran. The announcement included two wind-down periods to allow time to comply for those doing business that involved Iran. On August 6, 2018, the first wind-down period ended and triggered the re-imposition of some sanctions, and on November 4, 2018, the second wind-down period will end and trigger the re-imposition of full sanctions, which include a number of measures that target Iran's energy sector.
The October STEO assumes that the effects of sanctions will increase over the first few months of full implementation and that average Iranian crude oil production (excluding condensate) in 2019 will fall by approximately 1.0 million barrels per day (b/d) from Iran's April 2018 production level of 3.83 million b/d. This decline is similar to the drop in Iranian crude oil production when sanctions on Iran's Central Bank were imposed in 2012 (Figure 2). EIA also expects condensate production to fall as a result of the new sanctions. Crude oil and condensate exports are a significant source of revenue for Iran, with net oil exports estimated at $55 billion in 2017. The situation remains dynamic and the exact effect of the sanctions will depend on both the total volume of crude oil and condensate that comes off the market and the response from OPEC members and other countries.
According to data from ClipperData, Iranian exports of crude oil and condensate in 2018 peaked in June at more than 2.7 million b/d and averaged 2.4 million b/d more than the in first four months of the year (before the announcement of sanctions in May). In September, exports fell to 1.6 million b/d (Figure 3). Although some countries, such as France and South Korea, stopped importing crude oil and condensate from Iran in July, other countries continue to import from Iran, increasing the uncertainty in forecasting the effects of sanctions.
ClipperData indicates that China and India together received approximately 48% of Iranian crude oil and condensate exports during the first half of 2018. Over this period, China's imports from Iran averaged 649,000 b/d and India's imports averaged 557,000 b/d. However, China's imports dropped to 364,000 b/d in September, the lowest level since November 2015, and India's imports fell to 500,000 b/d. Whether the declining imports are entirely because of the sanctions or for other reasons is unclear. Trade press reports indicate a willingness on India's part to at least partially comply with sanctions; however, China has previously continued to import from Iran when sanctions were in effect.
In August, the European Union passed a blocking statute to protect European companies doing business in Iran from the effects of U.S. sanctions. Despite this effort, data from ClipperData indicate that France has not imported any crude oil or condensate from Iran since June. In addition, Italy's and Spain's imports from Iran in September were 137,000 b/d and 69,000 b/d, respectively, which was 27,000 b/d and 50,000 b/d lower than their averages for the first half of the year. Some countries could continue to import Iranian crude oil and condensate until the November 4 deadline, at which point they might stop importing from Iran. This uncertainty adds further complexity to forecasting the effects of sanctions because of the potential for significant changes to the volume of Iranian imports after the sanction deadline that is not reflected in current data.
Iranian exports have fallen at a faster rate than its production. Shipping operators have decreased operations with Iran, but Iran has continued to export largely through the state-run National Iranian Tanker Company (NITC) and the Islamic Republic of Iran Shipping Lines. Trade press reports indicate that as countries continue to decrease imports from Iran, some of Iran's shipping fleet is already being used as floating storage. EIA assumes that Iranian exports might continue to fall at a faster rate while floating storage is available. Iranian inventories in floating storage will be reflected in EIA's global inventories, but these barrels will not generally be available to the market. This situation creates the possibility that global inventories may increase, but crude oil prices will not reflect the inventory gains.
Saudi Arabia has most of OPEC's surplus crude oil production capacity that could be used to replace some of the Iranian crude oil barrels that are coming off the market. Saudi Arabia's Arab Light crude oil grade has an API gravity and sulfur content similar to that of Iran Light crude oil and may provide refiners with a possible crude oil that would not require refiners to make significant alterations to their crude slates. In addition, trade press reports indicate that Saudi Arabia is offering sales of Khuff condensate, but the extent to which Saudi Arabia and other OPEC members offer enough volumes to replace condensate from Iran is unclear.
EIA forecasts OPEC spare production capacity to average 1.6 million b/d in 2018 and to fall to 1.3 million b/d in 2019, down from 2.1 million b/d in 2017 and lower than the 10-year (2008–17) average of 2.3 million b/d. This decline creates a market with relatively low spare capacity at the same time production from Iran and Venezuela is forecast to decrease. The uncertainty of the total volumes of Iranian crude oil and condensate coming off the market and the potential for other supply disruptions are potential sources of upside price risk in the forecast.
After full sanctions are implemented in November, the total volumes of crude oil and condensate coming off the market will become more apparent in subsequent months. However, the total volumes affected are currently unknown and producers with the ability to replace some of the barrels would have to estimate the effects of sanctions. Significant differences between these estimates and the actual volumes taken off the market would likely result in increased price volatility.
Higher crude oil prices at the end of 2018 and in 2019 will likely support increased crude oil production. EIA forecasts U.S. crude oil production to increase by 1.0 million b/d in 2019. In 2018, EIA forecasts total global liquid fuels inventories to decrease by 200,000 b/d followed by an increase of 280,000 b/d in 2019 (Figure 4).
