June 23, 2018, by George Hay
LONDON (Reuters Breakingviews) – For oil market watchers, Donald Trump’s bark may be worse than his bite. The U.S. president on Monday responded to robust words from Iranian counterpart Hassan Rouhani by threatening “consequences the likes of which few throughout history have ever suffered before”. Those threats, however, may not extend to Iran’s oil exports.
The worst-case scenario of conflict between Washington and Tehran would admittedly screw up the oil market were it to mean a closure of the Persian Gulf’s Strait of Hormuz, one side of which is in Iran. In the first half of the year 22 million barrels per day of crude exports flowed through it, a fifth of global supply. But the more pressing question is what rising tensions mean for U.S. sanctions, which are due to snap back on Iran in November. In the last month Secretary of the Treasury Steven Mnuchin and Secretary of State Mike Pompeo have hinted that importers in countries like India which collectively import over 2 million bpd of Iranian crude could be accused of evading sanctions.
This is more than just an issue for Iran. Last month’s agreement by the Organization of the Petroleum Exporting Countries to raise output by 1 million bpd was partly struck in the knowledge that renewed sanctions could knock a similar amount off Iran’s 3.8 million bpd of oil output. But if no waivers are granted and all 2.7 million bpd of Tehran’s exports stop, oil prices could spike way above their current $74 a barrel.
That said, softball looks more likely than hardball. China, a big Iranian oil importer, may just ignore the U.S. sanctions and keep importing, making it harder to justify a complete ban on other importers like India or South Korea. Moreover, the U.S. Treasury has largely rowed back on a threat to freeze Russian group Rusal out of global aluminium markets.
Allowing Iranian oil importers leeway is even more likely given looming U.S. mid-term elections. Trump has pledged to keep domestic petrol prices low, and the most plausible way to do so is to not restrict supply. Rising oil prices would hit Trump’s supporters at the same time as a trade war with China pushes up import costs, hurting growth. That doesn’t make further splenetic tweets any less likely, but it does imply oil investors should downplay their implications.