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US foreign policy turn could take 1.4 million b/d off global oil market: analysts

Highlights

An expected, aggressive turn in US foreign policy led by incoming Secretary of State Mike Pompeo could trigger a loss of up to 1.4 million b/d in global crude supply by the end of 2018 as the Trump administration ramps up sanctions on Venezuela and Iran, analysts said.

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Pompeo, the CIA director whom President Trump picked Tuesday to replace Rex Tillerson as secretary of state, is expected to push for the US to exit the Iran nuclear deal and for new sanctions on Venezuela's struggling oil sector.

But while analysts agree that Pompeo's policy will be far more hawkish than Tillerson's, they differ widely on just how much this will impact future supply.

For example, Joe McMonigle, an analyst with Hedgeye Capital, said that re-imposing US oil sanctions on Iran could lead to the removal of as much as 1 million b/d of Iranian crude exports from the world oil market.



Richard Nephew, a principal deputy coordinator for sanctions policy at the State Department during the Obama administration, estimates that if US sanctions are renewed, Iranian oil exports will be reduced by 400,000 to 500,000 b/d, dropping them to about 1.9 million b/d.

And analysts with ClearView Energy Partners claim that the nuclear deal could remain intact even if the US leaves, ultimately having minimal impact on global supply.

"US sanctions, in the absence of reciprocal efforts by US allies, seem likely to shift Iranian crude volumes from low-risk-tolerance destinations to high-risk-tolerance destinations, changing flows without necessarily changing volumes," ClearView analysts wrote Tuesday.

IRAN DEAL

Iran plans to pressure OPEC to allow it to boost production by 100,000 b/d and begin negotiating an end to an ongoing production cut agreement, Iranian oil minister Bijan Zanganeh told the Wall Street Journal over the weekend.

Iran produced 3.83 million b/d in February, just above its quota under the OPEC production cut agreement of 3.80 million b/d, according to the latest Platts survey. That is up from 2.91 million b/d in January 2016, when the Iran nuclear deal went into effect.

The prospect of reimposed sanctions on Iran, however, would make boosting outlook unlikely.

The nuclear deal suspended US and European sanctions that severely restricted Iranian oil exports, in exchange for concessions on Iran's nuclear program.

Several Asian refiners that typically buy Iranian oil have told Platts they are seeking extra force majeure clauses in term contracts with National Iranian Oil Company or risk discounts, with the uncertain prospects of renewed sanctions.

Paul Sheldon, associate director, S&P Global Platts Analytics' PIRA Energy Analytics, said Wednesday that the impact of any change to the Iran deal may be delayed until late this year or early next year as international buyers could be given time to adjust. In addition, it remains unclear how many countries outside the US would comply with the decision to re-impose sanctions, he said.

"You'd probably see some reductions from allies like South Korea and Japan, but you wouldn't see full compliance," Sheldon said.

May 12 is the next deadline for the US to waive oil-related sanctions on Tehran as part of the Joint Comprehensive Plan of Action. Trump has said he would refuse to authorize that waiver again if the US Congress and European partners do not "fix" terms of the nuclear agreement.

Platts Analytics forecasts Iranian oil output to grow by 120,000 b/d in 2018 and 100,000 in 2019. This growth would be unlikely if the US attempts to re-impose sanctions, Sheldon said.

VENEZUELAN CRUDE

Venezuela's crude output was expected to continue to drop, even if Tillerson had remained as the US top diplomat.

Its production fell to a 30-year-low of 1.57 million b/d in February, according to the latest S&P Global Platts OPEC survey, not counting a major labor strike in late 2002 and early 2003.

But US sanctions on Venezuela's oil sector, specifically on exports to the US, could accelerate that decline, Francisco Monaldi, the Latin American energy policy fellow at Rice University's Baker Institute for Public Policy, said in an interview with Platts.

Venezuela oil output is in a "death spiral," which could be worsened by additional US sanctions, he said. Without new sanctions, Monaldi expects Venezuelan production to drop by 300,000 to 350,000 b/d by the end of 2018, but if oil-sector sanctions are imposed, the decline could be as much as 400,000 b/d by the end of the year, he said.

With additional US sanctions, Sheldon with Platts Analytics assumes Venezuelan output to decline roughly 360,000 b/d from 2017 to 2018.

"Risks are greater to the downside," Sheldon said, adding that with new sanctions in place Venezuela would be forced to ship to Asia and other more distant markets at potentially steep discounts.

The country is already struggling under crushing debt, crumbling infrastructure, labor unrest and spiraling inflation, all of which would be exacerbated by further US sanctions.

"Crude oil production losses are increasingly widespread and affecting joint ventures," the US Energy Information Administration said in a report posted on its website Tuesday. "A combination of relatively low global crude oil prices and the mismanagement of Venezuela' s oil industry has led to these accelerated declines in production."

OPEC SUPPLY CUT

The looming change in US diplomacy also complicates the future path of the OPEC- and Russia-led supply cut agreement.

Both Iran and Venezuela are party to OPEC's production cut deal, under which the organization and 10 non-OPEC allies led by Russia agreed to reduce supplies by about 1.8 million b/d to help rebalance the market and prop up prices.

Declines in Iranian and Venezuelan output due to sanctions could obviate the need for the rest of the OPEC/non-OPEC coalition to continue with their cuts. OPEC next meets June 22 in Vienna.

"If the US kills the sanction waivers in mid-May it is difficult to see OPEC and Russia have a consensus to continue the supply restriction deal at the end of June," Olivier Jakob, an analyst with consultancy Petromatrix, said in a note Wednesday. "In our opinion, the US killing the Iranian nuclear deal will at the same time kill the OPEC/Russian oil deal, hence the net impact on supplies is not that clear-cut."

OPEC as a whole produced 32.39 million b/d in February, according to the Platts OPEC survey, 340,000 b/d below its ceiling of about 32.73 million b/d, when every country's quota under its production cut agreement is added up.

Publicly, OPEC members are careful not to declare that any country's lost market share would be up for grabs.

But when US and EU sanctions hit Iran from 2011 to 2015 and the country's crude exports halved to about 1 million b/d, Saudi Arabia, Iraq, the UAE and other OPEC members, along with Russia, boosted their production and claimed some of Iran's former customers.

--Brian Scheid, brian.scheid@spglobal.com

--Herman Wang, herman.wang@spglobal.com

--Meghan Gordon, meghan.gordon@spglobal.com