The Trump administration is tightening the screws on Tehran’s economic pain, curtailing sanctions waivers it had previously granted to eight importers of Iranian crude effective May 2 and putting countries on notice that they could face financial repercussions should they flout the sanctions and continue to buy Iranian oil.
The decision to end the waivers came after phone consultations US President Donald Trump reportedly had with Saudi Crown Prince Mohammed bin Salman bin Abdulaziz and Abu Dhabi Crown Prince Mohammed bin Zayed al-Nahyan, in which he sought reassurances that the two Gulf producers would help stabilise the oil market following the withdrawal of more Iranian oil from global supplies.
Saudi officials were quick to endorse the Trump administration’s change over the waivers. Saudi Foreign Minister Ibrahim al-Assaf called the White House’s decision a “necessary step” to making Iran accountable for its “destabilising policies and support for terrorism.” Saudi Oil Minister Khalid al-Falih stated that Riyadh was committed to “stabilise” the oil market.
News of the waivers cancellation caused oil prices to jump 3%, supported by Tehran threatening to close the Strait of Hormuz, top Iranian crude buyer China making its displeasure known and doubt being cast on the collaboration of reduced output from OPEC members and independent oil producers that fostered a price recovery over the past four months.
A statement from White House Press Secretary Sarah Huckabee Sanders said: “President Donald J. Trump has decided not to reissue Significant Reduction Exceptions (SREs) when they expire in early May. This decision is intended to bring Iran’s exports to zero, denying the regime its principal source of income.”
There had been expectations that the Trump administration would extend waivers to at least three of the eight countries on its SRE list to avoid chaos in the oil market and to not further strain relations with key geopolitical players, such as Beijing and Ankara.
The administration was said to be internally divided over the waiver renewals, with US national security adviser John Bolton pressing for their elimination and US Secretary of State Mike Pompeo wanting a more measured response. Although Bolton’s camp won, the State Department is portraying Pompeo as the originator of the “zero Iranian imports policy” and arguing that the conditions were ripe for waivers to be discontinued.
The oil market and global diplomatic community were taken by surprise in November when the Trump administration granted 6-month SREs to China, Japan, India, South Korea, Taiwan, Turkey, Italy and Greece. The waivers allowed those countries to purchase reduced volumes of Iranian crude with the understanding that the levels should drop over the course of the 180 days for any extension to be considered.
The Trump administration justified the SREs as part of its efforts to phase out all Iranian crude exports by wanting to avoid a serious oil market disruption that would cause oil prices to skyrocket.
The Trump administration is using current oil market conditions to rationalise eliminating the waivers. US Special Representative for Iran Brian Hooks said that “because [in] 2019 we forecast more supply than demand, there are better market conditions for us to accelerate our path to zero [Iranian imports].”
The sanctions have taken a hard bite into Iran’s economy: Tehran’s crude exports have fallen from highs of 2.6 million-2.7 million barrels per day (bpd) to around 1 million bpd.
Three of the countries that had been granted waivers — Greece, Italy and Taiwan — opted not to take advantage of the exceptions and stopped buying Iranian crude. The other five, including Iran’s top two oil customers China and India, had been expecting and pushing for extensions.
Beijing, which accounts for close to half of Iran’s oil exports, denounced the Trump administration’s rescinding of the SREs. Chinese Foreign Ministry Spokesman Geng Shuang said: “China opposes the unilateral sanctions and so-called ‘long-arm jurisdictions’ imposed by the United States. Our cooperation with Iran is open, transparent, lawful and legitimate, thus it should be respected.”
Riyadh and its closest Gulf allies boosted oil production last summer and fall in anticipation of the US sanctions renewal on Iran, with Trump calling on their higher output to prevent soaring oil prices. However, the Saudis felt sucker-punched when the American administration issued the SREs in November. The exceptions combined with galloping US crude production and Riyadh’s own expanded output helped oil prices take a tumble to less than $50 a barrel.
Faced with the price collapse, a Saudi-led coalition of OPEC members and independent oil producers known as the OPEC+ alliance agreed to pull as much as 1.2 million bpd from the oil market, beginning in January. That cooperation helped tighten the oil market, pushing oil prices up more than $70 a barrel.
The questions facing the market are whether China will flex its economic and political power to buck the Trump administration’s hardened stance on Iran’s oil sanctions, what retaliatory steps Tehran might take in response to the loss of the waivers and whether the OPEC+ alliance continues to operate.
Jareer Elass is a Washington-based energy analyst, with 25 years of industry experience and a particular focus on the Arabian Gulf producers and OPEC.
This article was originally published in The Arab Weekly.