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Sanctions and the Tanker Market: Where to from here?

As the US decided to put a complete halt to Iranian oil exports, the tanker market is expected to face even more turmoil. In its latest weekly report, shipbroker Gibson said that “so, here we go again – Trump, waivers and oil prices. It feels like déjà vu, except this time there are no waivers. The US administration recently announced they will no longer grant waivers to countries importing Iranian crude in a bid to block their exports. However, if the US administration wants to lower crude prices it will rely on others to compensate after the benchmark Brent closed at its highest level in six months to $74.51/bbl on the back of this news”.

According to Gibson “fears of supply tightening were seemingly eased by comments from the administration, suggesting Saudi Arabia and the UAE would increase production to keep supply in line with current demand levels. However, Saudi Arabia’s energy minister seems to think otherwise, publicly stating they will not increase production pre-emptively, suggesting that the market is already well supplied and that they will wait to see the effect on supply first. The Kingdom is currently pumping around 9.8 million b/d, some 500,000 b/d below their agreed cut with OPEC+. Iran’s response has been somewhat muted, stating they will ignore any US action and will continue to export as much as they can regardless. Some outlets have suggested Iran could attempt to choke activity coming from the Strait of Hormuz; however, analysts have been quick to dismiss any such move”.

The shipbroker added that “the American Automobile Association has said the sanctions will have repercussions on America’s domestic market, predicting prices will rise to over $3 a gallon, up 15 cents per gallon on current levels as we enter the US ‘driving season’ and uncertainty creeps into the market. The choice to end waivers and implement sanctions comes at a time of increasing turmoil in the oil supply chain. Venezuela continues to be hampered by domestic issues and international sanctions. Libya also now looks an uncertain producer as fighting escalates in the country. Iran has exported over 1.1 million b/d in Q1 2019, over 1.3 million b/d less than during the same period last year. The EIA have now assessed the sanctions on Iran could leave a greater shortfall in world oil markets than previously estimated”.

“To make matters worse, Urals shipments through the Druzhba pipeline have been suspended due to concerns over contaminated crude, further exacerbating prices, with Brent briefly tipping over $75/bbl on Thursday morning. The crude is said to contain excess levels of chloride, potentially damaging refineries in the region. Japan and China have already started stockpiling Iranian crude in expectation that waivers would be withdrawn, with Iranian exports up in March by a fifth to 1.33 million b/d according to Argus, the highest since October, just before US sanctions were implemented”.

Gibson concluded that “it remains to be seen whether China and India will continue to buy Iranian crude, if sanctions are indeed imposed. In any case, total volumes are likely to fall. The question then is how Iranian barrels will be replaced, if Saudi Arabia decides to maintain production at current levels. In coming months, the country is also expected to increase direct burn of crude for power generation. This will only apply additional pressure on Saudi’s exports. As such, it seems likely that if none or too few additional barrels from the Middle East are forthcoming, upward pressure on oil prices will intensify. Brent, WTI and Oman are already at their highest level this year, so if the US administration plans on controlling and lowering oil prices, they may have to be careful what they wish for”.
Nikos Roussanoglou, Hellenic Shipping News Worldwide

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