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Five reasons behind the muted market reaction to the US leaving the Iran nuclear deal

Mon 14 May 2018 by Craig Jallal, tankers and markets editor

Five reasons behind the muted market reaction to the US leaving the Iran nuclear deal

President Trumpís withdrawal from the multi-national deal to halt Iranís nuclear weapons ambitions has drawn little reaction from the tanker market. Here are five reasons why

Last week, President Trump withdrew the US from participation in the Iran nuclear deal and announced  a restart to the sanctioning process.

Directly and indirectly, these sanctions will impact on those who deal in Iranian oil, insure Iranian crude oil cargoes, underwrite tankers in Iranian waters, and on the National Iranian Tanker Company (NITC).

When sanctions against Iran were waived in early 2016, NITC was celebrating its 60th anniversary and was the sixth-largest tanker owner in the world. According to VesselsValue, the company owned 37 VLCCs worth US$2.2Bn and brought 14.1M dwt of product to market. Fleet movement data analysis showed that roughly half the fleet had spent the time under sanctions storing crude oil and the rest trading with China and India under long-term barter agreements.

Given that NITCís return to the market was seen as such a big event, why has reaction been so muted now that Iran is once again being cast out of the market?

Here are five reasons why the US withdrawal from the Iran nuclear deal has had little impact on the tanker market.

  1. First, about half the 2.3M b/d of Iranian export crude oil still goes to China, India and Turkey (about 1.2M b/d is exported to those three nations, according to Poten and Partners head of research Erik Broekhuizen) and will continue to do so after US sanctions are re-imposed. The main impact will be on the independent tanker operators, mainly Greek, who carried as much as 50% of the Iranian crude reaching China. Insurance companies will be very reluctant to underwrite cargoes and vessels touching Iran after the sanctions are imposed.
     
  2. Second, the US is no longer impacted by the loss of Iranian crude oil. The impact will be on those remaining in the Iran nuclear deal, especially the nations which, under UN rules, are allowed to buy Iranian crude oil but could be stymied by sanctions via the US banking system. The big losers are those who re-entered trade with Iran under the umbrella of the nuclear weapons deal, such as France with Totalís US$5Bn 10-year deal to open South Pars gas reserves.
     
  3. Third, if Iranian crude oil is stymied by US sanctions and the US banking system is limiting access to finance and insurance, then OPEC will have to open the taps to replace the loss of Iranian crude oil. Otherwise, the price of crude will increase beyond OPECís self-imposed limits.
     
  4. Fourth, what will the EU, Russia and China do to slow down the ĎAmerica firstí approach on trade and foreign policy? The US has new directions on steel and aluminium tariffs, trade with China, NAFTA, WTO, the Mexican border, Syria and Israel. Elsewhere, Japan and South Korea Ė currently importers of Iranian crude oil Ė have to side with the US now that President Trump is close to finalising a deal with North Korea and its nuclear weapons programme.
     
  5. Fifth, itís a question of timing. The re-imposition of sanctions was broadcast months ago by President Trump during his presidential campaign, so the market was prepared and has discounted the impact. Another timing factor relates to sanctions being phased in. For NITC, the re-imposition of sanctions will take place in 180 days time. That is a long time in the Ďworld of Trumpí. For instance, in the last 180 days he has sacked nine key personnel, including a former ExxonMobil chief and Secretary of State Rex Tillerson. It is conceivable that President Trump will decide he has gained enough from his threat of action, and forego sanctions.

As I see it, these are the five main reasons market reaction to the US move has been relatively muted. If you have a different viewpoint, contact me at craig.jallal@rivieramm.com.

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