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Trump wins; U.S. Sanctions Cripple Iranian Oil Exports

 With nearly 50 days to go before new U.S. oil sanctions against Iran enter into force, President Donald Trump has already managed to crush the country’s petroleum exports, dealing severe economic damage to Tehran.

Iranian oil exports have plunged about 35 percent since April, the month before Trump ripped up the diplomatic deal that Barack Obama negotiated to curtail Tehran’s nuclear program and announced new oil sanctions.

“Iranian oil exports are coming down pretty hard,” said Roger Diwan, a veteran oil analyst at consultant IHS Markit Ltd.

Despite stiff opposition in Europe and avowed hostility from China in particular and India, the two top buyers of Iranian crude, Trump stuck to his tough stance, digging his heels in.

The decline in oil exports, oil being a major source of tax revenue for Iran, has negatively impacted Iran’s currency, the rial thus pushing up inflation.

Buyers in Europe and Asia including Japan and India are scared of sanctions if they continue to trade with Iran. Already, according to Bloomberg tanker tracking, in the first two weeks of September, Iran sold an average of 1.6 million barrels a day, down from 2.5 million barrels a day in April.

“The physical market has clearly tightened, reinforcing the bullish narrative on geopolitical and supply risks,” said Thibaut Remoundos, founder of Commodities Trading Corporation Ltd. who’s been trading oil for more than 20 years.

Oil losses from Iran cannot be compensated even though Russia and Saudi Arabia boost their own output.

European countries could oppose Trump’s actions but European refiners cannot since they have had little choice but to comply with sanctions. Washington can cut off access to the U.S. financial system for any company judged to be doing business with Iran.

With early indications that European nations and Japan will stop buying Iranian crude altogether next month, the country’s exports can easily drop another 350,000 barrels a day by November, down to about 1.3 million barrels a day. South Korea, a major importer of Iranian crude in the past, hasn’t shipped any oil from Iran for 75 days.

Iran isn’t just losing customers for its crude, like it did under earlier sanctions from 2012 to 2015, but also for condensate, a form of super-light oil used mostly in the petrochemical industry. With South Korea not buying any, total Iranian exports of condensate dropped in the first half of September to 175,000 barrels a day, down more than 40 percent from April.

The earlier-than-expected decline in both crude and condensate exports appears to be a reaction to U.S. banking and shipping insurance sanctions that went into effect over the summer.

“The first wave of sanctions in August sent the message to the market that the U.S. was serious, and I think has resulted in these early cuts to Iranian exports ahead of the Nov. 4 implementation of oil sanctions,” said Joe McMonigle, energy analyst at Hedgeye Risk Management LLC and a former senior official at the U.S. Energy Department.

Iran attempted to woo and win the buyers like China and India by offering to ship crude in its own tankers at no extra cost but in vain; in the first two weeks of September, India has loaded just 240,000 barrels a day of Iranian oil, less than half the usual amount.

Despite the initial success, the White House is still far away from its official aim of cutting Iran’s oil revenues to “zero.” But there are reasons to think exports could plunge lower still.

After Nov 4., even the countries that continue buying Iranian oil will struggle to transfer the money back to Tehran, potentially stranding billions of dollars in revenues overseas and forcing Iran into barter deals that swap crude for other goods, traders said. In that way, oil exports will remain above zero, but Iran will receive only a portion of the revenues.

“The loss of Iranian exports is gaining pace,” said Amrita Sen, chief oil analyst at Energy Aspects Ltd. “This has led to a rise in floating storage off Iran and onshore storage is nearly full.”

 

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