Oil exporting nations to benefit from US sanctions on Tehran

As part of its Article IV consultations with member countries, the International Monetary Fund (IMF) made it clear to oil exporters last year that their fiscal deficits would worsen and current account surpluses be in jeopardy. As the US walks back into sanctions on Iran, those countries would heave a sigh of relief.

Nowhere was the strain more evident than in an IMF staff report on Saudi Arabia for 2017. “Non-oil growth is expected to pick up this year but overall Gross Domestic Product growth will be close to zero, given the decline in oil production.” It went on to note: “Effective prioritisation, sequencing and coordination of the reforms is essential, and they need to be well-communicated and equitable to gain social buy-in and ensure their success.”

Such a tone was usually reserved by the IMF for regions of the world other than the Middle East. It is this downside impact that gives the non-Iran bloc in the region their reasons to feel comfortable with President Trump’s walk back from the Joint Comprehensive Plan of Action on Iran. The budgets of other oil producers, such as UAE and Kuwait, had begun to go askew as prices refused to climb. The chances of their numbers looking better now with Iranian oil export again under pressure has vastly improved.

So much for the sellers. What about the buyers?

Among the three largest buyers of Middle East fuel, Trump has an advantage with both Japan and India. It is with China that he will be on a weaker wicket. India, especially, has begun to align closely with US interests on energy and is in a particularly delicate spot now. It has just opened bids for new oil and gas exploration blocks under the Open Acreage Licensing Policy. The results are expected to be declared by July and, meanwhile, India can ill afford to make any move that annoys the US-based energy companies.

What about Iran? The country could actually find the sanctions short-lived, as it might create space for the European Union and Teheran to meanwhile negotiate a stronger, better deal, that turns out to be better for all concerned but which the latter had been resisting.

In the immediate aftermath, if the price of crude oil climbs over $80 a barrel, as it most certainly looks it will, Iran might also find the sanctions less biting for its economy. The 14-member Opec countries have already cleared the froth from the world market by sticking to their production cuts. The problems in Venezuela, the country with the largest oil reserves but whose production has slumped badly, has made the oil market its tightest for decades. Even this week, the US slapped more sanctions on Caracas.

Within Opec, almost the entire supply of more than two mbd (million barrels per day) of spare capacity is held only in Saudi Arabia. “In turn, this emphasises the crucial role Opec’s largest producer continues to play in providing stability to global oil markets”, notes IEA. But, the country needs to push up the valuations of Aramco, the largest oil producer country in the world, before it hits the stock market. And, so, has no reason to raise production beyond current levels.

Still, there could be reasons for India to be optimistic on the sanctions. In a tight oil market, the higher the price per barrel, the more would the US fret over Iran getting away with less damage to its economy. It would be realising more revenue per barrel it sells, even with a cap on how much it could sell.

In any case, with such tightness, Iran will find buyers for its albeit heavier crude across the globe, willing to pay through the black market. Having played the sanctions game till so recently, Iran has its institutional financial structure intact to play it once again.

India could find itself back to the same place it had just thought it had extricated itself from recently. The only difference is banks like Kolkata-based UCO Bank that had played a key role in routing payments to Teheran are in worse financial condition than before. The Reserve Bank placed the bank under a Prompt Corrective Action framework last year. That regime might need to be eased.

Among the three largest buyers of Middle East fuel, Trump has an advantage with both Japan and India. India, especially, has begun to align closely with US interests on energy and is in a particularly delicate spot now