Alexander Pasechnik, head of the analytical department, the National Energy Security Foundation Iranian oil embargo and US sanctions on SCO territory / SCO Shanghai Cooperation Organization

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Iranian oil embargo and US sanctions on SCO territory
04.06.2019 16:21 Alexander Pasechnik, head of the analytical department, the National Energy Security Foundation

The US sanctions with regard to Iranian oil came into force in May: the Donald Trump administration revoked permission to buy Iranian oil it had given some countries as an exception six months before.

Even though Tehran warns about Saudi Arabias limited ability to increase oil output, it looks more like defensive rhetoric. Besides, Saudi Arabias actions are constrained by the OPEC+ deal.

The White House blindly believes in the potential of sanctions, announcing the ambitious plans to reduce oil exports from Iran to zero and thus disrupt the countrys economy. Washington threatens to draconian measures against any state that continues energy cooperation with Iran. The toughening of sanctions against Iran will result in a fast drop of oil supply in the world, by over 1 million bbl daily. But, perhaps, not everyone will agree to comply with the sanctions regime. This is especially true about China and Turkey, which have been strongly criticizing Washington for this initiative.

In response to the US actions, Iran has begun gradually withdrawing from the nuclear deal, which raises concerns all over the world. Tehrans inventory also includes the scenario of shutting down the Strait of Hormuz for tankers, and this is the artery through which about one fifth of the worlds oil is transported. The United States promises to respond by removing the lock by force. Two strategic bombers have already arrived at the US base in Qatar. In addition, the White House has voiced plans to send an aircraft carrier to the Iranian shore, and the commander of the Corps of Islamic Revolution Guards has already described it as a target.

The scenario of potential mayhem in the Persian Gulf encourages stock exchange gamblers to place bets on growing oil prices. Brent has been trading above $70 for bbl for over a month. Further developments in the oil market are firmly linked to the geopolitical tensions around Iran and Venezuela, which have already resulted in an update of oil price forecasts by various reputable sources.

For example, the US Energy Information Agency of the Department of Energy increased its forecast of the average Brent price in 2019 from $65.2 to $69.6 per bbl.

Investment banks concur with the EIAs vision. UBS raised its short-term forecast of the Brent price to $70-$80 per bbl on a three-month horizon due to the position of Saudi Arabia, which continues insisting that it wants to achieve a balance on the global oil market. Analysts of Goldman Sachs pointed out that oil prices retreat from the $75 threshold was against the fundamental picture, given the growing risks of supply and signs of improving demand.

However, the new economic forecast of the European Commission has a lower average Brent price for 2019 approximately $69.2 per bbl, as opposed to $80.6 predicted in the autumn.

The EC believes that the US sanctions against Iran and Venezuela will be counterbalanced by the recovery of oil production in Canada and growth of US slate oil exports by the end of the year. And although a plunge in Venezuelan oil output is quite likely, given the ongoing political and economic crisis in the country, elimination of Iranian exports is not a plausible scenario. Instead of losing all of its big customers, Tehran will offer them mechanisms for bypassing sanctions: from disguising tankers routes to introducing new settlement mechanisms with counterparties.

Americas bet on cutting off Iranian oil exports encroaches upon the interests of not only individual countries, but also international alliances. For example, China and India, which are SCO members, are puzzled by Washingtons restrictive policy towards Tehran: Iranian oil accounts for a significant share of these two countries oil purchases. And the US actions can be interpreted as undermining their fundamental energy security.

Naturally, the SCO member states will not ignore the issue. Russia and China earlier proposed the topic of resisting the US sanctions policy for consideration of all SCO countries. This agenda is becoming relevant again. The organization will work on new measures of protection against Washingtons sanctions and, quite probably, will offer corresponding counter-algorithms in the near future.

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