LAUNCESTON, Australia (Reuters) - U.S. President Donald Trump has shown his cards on sanctions against Iran’s crude oil exports, but whether he has played a winning hand depends on what the other players are holding.
The decision by the Trump administration not to renew any of the waivers extended six months ago to eight importers of Iranian crude, including top buyers China and India, is a clear escalation of Washington’s campaign against Tehran’s nuclear programme.
But Trump’s move will only work in exerting maximum pressure on Iran’s leaders if a range of other parties decide to play along, or at least defer to Washington’s moves.
The first key reaction will come from the buyers of Iranian crude, especially China.
China is on track to take 750,000 barrels per day (bpd) of Iranian crude in April, or about half of Tehran’s total exports, according to vessel-tracking and port data compiled by Refinitiv.
This is actually higher than the 500,000 bpd the world’s biggest crude importer bought in February and the 600,000 bpd imported from Iran in March.
It may be the case that Chinese refiners are stocking up on Iranian crude in anticipation of not getting any more from May onwards, or it could be a sign that Beijing is prepared to defy the United States on sanctions against Iran.
It’s also quite likely that China’s compliance with the U.S. aim of reducing Iran to zero crude exports will become a factor in the ongoing trade talks between Beijing and Washington.
If the Chinese decide they will comply and they halt all purchases from Iran, it would be logical to expect that they will demand concessions in other areas from the United States.
The same may be said for India, the second-biggest buyer of Iranian crude with forecast purchases of 290,000 bpd in April.
India is also likely to want something in return from the Trump administration, and similar to China, New Delhi also has trade tensions with Washington, even if they haven’t yet erupted into a tariff war.
The second key reaction to the end of waivers will come from Saudi Arabia and other allied producers in the Middle East, such as the United Arab Emirates and Kuwait.
It’s likely that Trump is betting the Saudis will prove to be good allies and make up for the loss of Iranian exports, perhaps with contributions from the region’s other producers.
Iran is on track to export around 1.5 million bpd in April, according to Refinitiv data, which is already well down on the 2.3 to 2.5 million bpd it was shipping prior to the renewal of U.S. sanctions in November last year.
While it’s quite possible for the Saudis to make up for the loss of Iranian oil, they will no doubt be judging how much extra oil to make available to the market.
For the Saudis that amount is enough to ensure that Trump is appeased and that refiners, particularly in Asia, are sufficiently supplied, but not so much as to cause prices to drop.
So far the Saudis are playing it cool, with Energy Minister Khalid a-Falih saying in a statement that the world’s largest crude exporter will “coordinate with fellow oil producers to ensure adequate supplies are available to consumers while ensuring the global oil market does not go out of balance”.
If China and India, and the other smaller buyers of Iranian crude, do play ball with the Trump administration, and the Saudis and allies do pump up output to cover any shortfall, it may be the case that Washington is playing a winning hand.
But that ignores that Iran has yet to fully show its hand.
It seems that while Washington is paying lip service to the idea of negotiating a new nuclear agreement, the real aim of the hawks in the Trump administration is regime change by forcing impoverished Iranians to revolt against their rulers.
It’s unlikely that Iran’s leaders will choose to go quietly and a desperate regime may decide to engage in conventional warfare by trying to block the key oil channel of the Straits of Hormuz, or use proxies to launch a terrorist campaign against the United States and allies.
Perhaps the least likely outcome is Tehran sitting down and agreeing to a new deal on Washington’s terms, something that would be humiliating, even if it would allow the survival of the current political leadership.
While all these political calculations are being made, the crude oil market is going to be making its judgment through the price mechanism, with Brent jumping 2.9 percent on Monday to close to $74.04 a barrel.
It’s also likely that heavier grades of crude will outperform lighter varieties such as Brent, given much of what Iran exports is heavier crude.
Iraq’s Basra Heavy, as assessed by Argus Media, jumped 3.1 percent on Monday to close at $72.36 a barrel, narrowing its discount to Brent.
While it’s likely that world oil supply can match demand even with the loss of Iranian exports, there could end being a mismatch on the types of crude available and what refiners actually want.
Many Asian refiners prefer heavier crudes as they maximise output of middle distillates, while much of the addition to world crude supply has been lighter grades, such as U.S. shale.
It’s not just politics that will determine if the United States has outplayed Iran, if fuel prices start to rise because refiners can’t get enough of the right types of crude, consumers will know where to direct their anger.
As a sign on the desk of former U.S. President Harry Truman said: The buck stops here.
Editing by Joseph Radford