The Trump administration will likely grant Iranian crude buyers less leeway from sanctions that snap back in November than the Obama administration granted in 2012-2015, but an oil price spike would force the White House to ease its enforcement, analysts said.
Iran's oil customers have until Nov. 4 to wind down their contracts before U.S. sanctions go back into force and block them from the U.S. banking system.
The Treasury Department has said it would consider exemptions for countries that demonstrate significant reductions of Iranian purchases in the next six months, but not all analysts expect the White House to grant any sanctions relief.
Most analysts surveyed by S&P Global Platts predict the sanctions will remove less than 500,000 barrels per day of oil supply from the global market by the November enforcement deadline, ranging from 100,000 bbl/d to 200,000 bbl/d at the low end and up to 800,000 bbl/d at the high end.
Iran has boosted its oil production nearly 1 MMbbl/d since the nuclear deal lifted Western sanctions in January 2016. It produced 3.83 MMbbl/d in April, according to the latest S&P Global Platts OPEC survey.
"We think Trump is very focused on the oil revenue," said Joe McMonigle, an analyst with Hedgeye Risk Management and former Department of Energy chief of staff. "If the U.S. were to grant exemptions for European countries, it would really undermine the effectiveness of the sanctions. We just don't see that happening."
McMonigle expects companies to be very conservative during the wind-down period and start making real reductions.
"We'll start seeing oil come off the market soon," he said.
The Obama administration pushed countries to cut Iranian oil imports by about 20% every six months to qualify for sanction waivers.
"They may try to be stricter and not succeed," analyst Kevin Book said of the Trump administration. "Part of the rationale behind the 20% number appears to have been that it was pretty difficult to get even 20%."
Book, managing director of ClearView Energy Partners, said the challenge for U.S. State Department negotiators will be getting countries to agree to some import cuts without asking so much of them that they completely balk.
"For import-dependent countries, this is not a small ask," he said. "You're asking another country to sacrifice its energy security for a national security goal that may not involve that country."
The White House will be watching U.S. domestic gasoline prices in the coming weeks to determine how tough it wants to be on Iranian oil buyers, said UBS analyst Giovanni Staunovo. He said the U.S. will likely push for 20% import reductions, in line with the Obama administration, but it would have to lower those expectations if the oil market tightens.
$80/bbl oil threshold
Sara Vakhshouri, president of SVB Energy International, agreed that U.S. enforcement will depend on oil prices, with the administration likely being comfortable pressing Iranian oil buyers to make additional reductions as long as oil prices stay around $80/bbl. A price spike that sends prices much above that level would set off alarms in Congress as voters feel the pinch of retail pump prices during peak summer driving season.
She pointed to Trump's April 20 tweet blasting OPEC for "artificially very high" prices after Saudi Arabia's reported desire for $100/bbl oil.
However, Saudi Arabia's energy ministry said this week that the country would ensure stability in the oil market to mitigate any supply shortages from Iran.
"It's very much dependent on Saudi," Vakhshouri said. "If Saudi doesn't want to cover for Iran, the prices could go higher, of course. Then maybe Treasury starts to adjust the reductions."
The level of import reductions will also depend on how the Treasury Department treats condensates. If it considers them as part of a country's total reductions, then cuts will be easier for some countries, analysts said.
"That could seriously shape the question of Korean compliance," said Book, pointing to 200,000 bbl/d of South Korean imports of Iranian condensates.
John Hughes, former head of the Iran sanctions team in the State Department's Bureau of Economic and Business Affairs during the Obama administration, said the next six months will be a "very messy process" within the U.S. government as it negotiates with importing countries and decides how it wants to consider their waiver requests.
Hughes, now a vice president at Albright Stonebridge Group, said the Obama administration weighed a variety of factors and did not just look for a straight 20% reduction.
"There is no specific number or target," he said. "It takes into account a number of different factors, including the relationship with that country, whether the country takes reasonable efforts to reduce, or if there's any extenuating circumstances that may make it more likely or less likely that they're able to reduce a certain amount."
US crude exports at play
For example, Japan suspended nuclear power generation for nearly two years after the March 2011 earthquake and depended on oil and gas imports for electricity during the last Iran sanctions enforcement.
As a major new outlet for U.S. crude exports, Japan has another argument for flexibility that will present an interesting dynamic for U.S. negotiators, Book said.
On one hand, "State Department negotiators can be very hard line and say, 'We are an energy source to you, so let us be the resource in place of Iran,'" Book said. "On the other hand, Japan can say, 'We are a market for you and we've signed a Japan/U.S. energy partnership and we're about developing markets, not cutting them off. So treat us with a light touch.'"
Looming over the U.S. enforcement process will be Iran's response. If Tehran follows through with threats to restart its nuclear program, the EU would be forced to reimpose its own sanctions, McMonigle said.
"That's a key next catalyst for oil markets," he said.
If European companies "can't get the exemptions from the U.S., Iran is not going to get any of the benefits of the deal," he said. "So one would think, at least taking their public comments at face value, that they would exit the deal at some point and go back to pursuing nuclear weapons."
This article was written by Meghan Gordon, who is a reporter for S&P Global Platts, which, like S&P Global Market Intelligence, is owned by S&P Global Inc.