For fragile oil markets, the outcome of the US elections next week poses another danger: the possibility that Iran, the main producer, will regain its role in international trade.
Joe Biden, the leader in most polls, has indicated that he will seek to bring Iran back into the 2015 nuclear deal brokered by the United States while he was Vice President under Barack Obama. This means that the economic sanctions imposed by President Donald Trump, which have been tightened further this week, could eventually be eased, opening up prospects for more than 2 million barrels per day of Iranian crude oil exports.
The timing for the oil market is fraught with risks: OPEC, which includes Iran, is restricting supply to support prices as the Coronavirus destroys demand. Brent crude fell about 5%, on Wednesday, to about $ 39 a barrel, continuing its decline this year to 41%.
If Biden wins, Wall Street banks including Goldman Sachs, GBMorgan and RBC Capital Market see between 1 and 2 million barrels per day or more of Iranian crude oil will reach the market next year.
In Tehran, the country’s leaders are not saying how much or when they can boost production and exports in the event the United States returns to the nuclear deal and begins removing sanctions.
The data collected by the US agency “Bloomberg” shows that Iran has the ability to pump about 3.8 million barrels per day, as it produces only about half of this amount and consumes most of the crude oil itself.
“In a few months’ time if Biden wins, we expect some Iranian oil to hit the market. It will be a real problem for OPEC,” said Iman Nasseri, managing director for the Middle East at FGE Consulting, a London-based firm.
The Organization of the Petroleum Exporting Countries (OPEC) and its allies such as Russia agreed in April to cut 9.7 million barrels per day, or about 10% of global supplies, from the market. The coalition is already reassessing its plan to reduce production cuts next January, in light of the renewed epidemic shutdown in Europe and elsewhere and the sudden recovery in production from Libya as the truce continues in the war-torn country.
And increased shipments from Iran could destroy the OPEC + cuts agreement and cause prices to fall further. However, Iran’s quick return to the market, even if Biden wins, is not a sure thing.
The Islamic Republic may have to wait until its presidential elections next June to define its strategies. If a more conservative government comes to power, as many analysts expect, Tehran may lead a more difficult deal with the United States before agreeing to resume negotiations over its nuclear program. This may delay the timing of any lifting of sanctions.
The domestic politics of the United States can complicate matters. To be sure, any new approach to Iran would face opposition in Congress and from the American public who has been adapted to think of Iran as an enemy since the Islamic Revolution in 1979. By tightening sanctions this week, Trump could make it more difficult for Biden if he wins.
Nevertheless, the Bloomberg report explains, the US president has the authority to reduce sanctions through executive orders or by issuing waivers that allow the purchase of Iranian oil. The sanctions waivers may be an encouragement for Iran to return to the talks. The U.S. has allowed waivers in the past, and FGE’s Nasiri said Biden will likely re-apply them.
The White House will also need to address the concerns of its allies in the Gulf. While the Biden administration may take a tougher stance with Saudi Arabia, the kingdom is the largest producer of OPEC and the main geopolitical rival of Iran. If more Iranian barrels are pumped, crude oil prices will drop further, and the Saudis and other Arab oil countries will suffer.
For her part, Karen Young of the “American Enterprise” Institute in Washington said, “Using the easing of sanctions on oil as a bargaining tool in 2021 is a bad idea because of the reaction of other regional exporters.” Instead, it proposes that the United States offer aid or release Iranian money that it seized in foreign accounts. “Some kind of economic relief is an imperative and an incentive to bring them to the negotiating table,” Young added.
Under Trump, mounting sanctions have crippled Iran’s economy and cut crude oil sales. Trump contradicted the policy of his predecessor, Obama, who joined other world powers in the 2015 deal, easing sanctions on Tehran in exchange for restrictions on its nuclear activities.
After sanctions were eased, Iran added 1 million barrels of daily production in one year to the 2.8 million barrels it was already pumping. Exports rose faster, by 700,000 barrels per day in the four months ending April 2016.
Muhammad Ali Khatibi, Iran’s former envoy to OPEC and a former official at the state oil company, said Biden would have a better chance than Trump to reach a deal.
Trump insists that Tehran halt what he views as geopolitical interference in countries such as Iraq, Lebanon and Yemen before he agrees to any talks, a demand Iran rejects.
Khatibi explained on Monday, “If Biden returns to the JCPOA and advances Iran’s interests under the agreement, Iranian oil exports will increase. But if he chooses to follow Trump’s path and make human rights and regional issues a prelude to lifting sanctions on Iranian oil, the situation will not change much.”