U.S. Seeks to Quickly Curb Iran Oil After Scrapping Deal

(Bloomberg) -- The U.S. is giving its allies 180 days to extricate themselves from Iranian oil deals, making explicit its desire to start curbing the nation's crude exports quickly in a bid to go after Tehran's economic lifeline.

The sanctions “effectively” go into place immediately, U.S. Treasury Secretary Steven Mnuchin said after President Donald J. Trump announced the withdrawal from the Iran nuclear agreement. In a document accompanying the announcement, the Treasury Department gave an unequivocal "Yes" to the question of "Will the United States resume efforts to reduce Iran's crude oil sales?"

It was a message harsher than some oil traders had expected. Yet Mnuchin said his “expectation is not that oil prices go higher,” adding that the U.S. has spoken to “various parties that would be willing to increase oil supply" to offset Iran.

Almost simultaneously, the Saudi state-owned press agency quoted an unnamed energy official as saying Riyadh would work "to mitigate the effects of any supply shortages" in the oil market.  

While oil prices settled lower on Tuesday having climbed throughout the previous week in the run-up to Trump's widely anticipated withdrawal, they began to rally in after-hours trade and into the Asian morning on Wednesday. U.S. West Texas Intermediate futures rose as much as 2.4 percent to $70.72 a barrel in New York and Brent in London climbed 2.5 percent to $76.75. Both are at the highest level since November 2014.

“Countries that seek a ‘significant reduction' waiver from the State Department in order to avoid secondary sanctions will need to demonstrate reductions in purchases by November 4th, so changes in buying patterns should be observed in the coming months,” James Lucier and Tristan Berne of Capital Alpha Partners said in an emailed note.

Seven years ago, when the U.S. and its allies imposed additional sanctions on Iran because of its nuclear program, buyers in Europe and Asia switched to purchasing from Nigeria, Saudi Arabia, Kuwait, Iraq and Angola, according to the U.S. Energy Information Administration. China increased its buying from Angola and Iraq and other Asian countries imported from Nigeria.

“The Iranian oil sanctions during the Obama era reduced Iranian crude oil production by 1 million barrels per day,” Chris Lafakis, an energy economist for Moody's Analytics, said in a statement. “The U.S. sanctions announced today are expected to result in a decline in Iranian crude oil production of 400,000 barrels per day. What made the multilateral sanctions enforced during the Obama era so effective was precisely the fact that they were multilateral, whereas President Trump's sanctions are not.”

Mind the Gap?

Curbing Iran's output now would open room for Saudi Arabia to fill the gap, since it's the member of OPEC with the most spare capacity. After the last round of sanctions, Saudi Arabia boosted oil output in response to what at the time Riyadh described as additional demand from customers.

Crown Prince Mohammed bin Salman told Bloomberg in April 2016 that his country could raise output to 11.5 million barrels a day immediately. It has never produced more than the 10.63 million it pumped in the third quarter of 2016, prior to the OPEC and non-OPEC agreed cut.

Whether or not Saudi Arabia wants to raise output, given the kingdom's interest in seeing crude prices reach $80, may be another matter. Brent crude, the international benchmark, has climbed 12 percent this year. It settled at $74.85 a barrel after the announcement in Washington.

The U.S. made clear it would go after other nations doing business with Iran and would specifically target reinsurance -- a particularly effective method of halting Iranian oil tankers in the past. The Treasury Department also said it was keeping close track of "the quantity and percentage of the reduction in purchases of Iranian crude" during the 180-day wind-down period, especially for anyone seeking waivers to allow for some oil purchases.

Trump "directly threatened countries that refuse to cooperate with U.S. sanctions implementation," Richard Nephew, senior research scholar at Columbia University's Center on Global Energy Policy, said in a blog post. "Notwithstanding the new guidance and mindful of decisions made regarding aluminum and steel tariffs, countries will likely reach out to the U.S. to seek clarification as to exactly what will be demanded of them and their companies."

--With assistance from Julian Lee David Marino and Saleha Mohsin

To contact the reporter on this story: Javier Blas in London at jblas3@bloomberg.net.

To contact the editors responsible for this story: Will Kennedy at wkennedy3@bloomberg.net, Tina Davis, Carlos Caminada

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