Will Iranian Sanctions Tamper Oil Price Volatility?

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With Israel and Iran exchanging tit-for-tat strikes in an increasingly escalated fashion, the question remains large as to what will happen to the global supply of crude oil should the Middle Eastern conflict persist. With President Biden’s recent signing of a US Security Package aimed to increase pressure on Iran, Russia, and China, whom Biden referred to as “Putin’s Friends” in a statement, time will tell as to the effectiveness of a new round of U.S. sanctions on easing global uncertainty for crude.

Oil Prices Swing After Iran and Israel Exchange Strikes

Oil prices briefly surged on April 19 when Israel struck back at Iran in response to Tehran launching over 100 missiles and drones against them, which was itself in response to Israel striking an Iranian embassy in Syria. On April 19, international benchmark, Brent Crude, shot up nearly 2% to just under $88 per barrel. 

However, after Iranian officials downplayed Israel’s retaliatory strike and talks of an Israeli-Hamas ceasefire percolate, Brent Crude futures have dropped to around $87.28 as of the publication of this article. International conflict, especially in the Middle East, is never good for price volatility. As we enter the heavy summer driving months, Americans are more anxious than ever as to where prices at the pump will go from here.

Iran Sanctions Seek to Quell Further Unrest

On April 24, President Biden signed into law the National Security Package that was passed in the Senate earlier this month. The recently passed a US Security Package, which includes new Iran sanctions measures, has raised questions about its potential impact on the oil trade and whether it can be used to pressure China to reduce its exposure to Iranian oil. 

Experts suggest that while the new US sanctions legislation may not immediately disrupt the oil trade, it could serve as a tool to influence China. The Biden administration might leverage these measures to encourage Chinese buyers to decrease their reliance on Iranian oil. This is particularly significant as China is the largest purchaser of Iranian crude, accounting for approximately 90% of Iran’s crude exports. 

However, it remains to be seen how effective the new measures will be in subduing Iranian-origin crude flows to top customers such as China and Russia. Iranian crude is often sold to independent refiners in China at steep discounts, and buyers frequently trade goods instead of paying cash. According to market sources, almost all Iranian cargo is paid in Chinese yuan instead of dollars.

Targeting Financial Institutions Engaged with Iran

The new legislation expands sanctions on the Iranian oil trade since it includes secondary sanctions on financial institutions facilitating that trade. According to international sanctions attorney and partner at Bass, Berry & Sims Thad McBride, “Access to the U.S. financial system, including through the use of dollar-denominated transactions, continues to be important to most major banks and other financial institutions, even in China. The threat to Chinese actors of being blocked from that access may be potent. We have seen, at least anecdotally, that Chinese banks are reluctant to engage in transactions with Russia even when those transactions may be legally permissible under U.S. law, given the threat of U.S. sanctions. There could be a similar impact with respect to transactions involving Iranian oil.”

The legislation also requires the executive branch to report on the implementation of the measures after 180 days. However, there are still questions about how the measures will be implemented, mainly since the legislation includes a waiver if entities have ceased their trade or are taking steps to reduce their involvement. 

“Many non-U.S. financial institutions are so wary of U.S. sanctions that they will refuse to engage in transactions with Russia (or Iran) even when the transaction is permissible under U.S. sanctions,” McBride noted. “The waiver provision is broad. It gives the president discretion to assess how and when sanctions measures should be imposed. It does not mean that the president will not decide to impose sanctions. It simply provides flexibility to apply sanctions or not based on the totality of circumstances as opposed to under a specific black-or-white trigger.”

Difficult Implementation May Hamper Effectiveness

Because the trade is illegal, it poses obvious challenges for the US in curbing it. Some experts believe that significant measures to restrict Iran’s oil production and exports are more likely to be implemented after the US presidential elections in November. These measures could potentially involve empowering Israel to target some of Iran’s critical energy infrastructure. 

The new legislation doesn’t add new sanctions powers but focuses on some nodes in the supply chain. According to a report in S&P Global Commodity Insights, Rachel Ziemba, a senior adviser at political risk consultancy Horizon Engage, adds more public scrutiny around this trade because the administration must report on its policies.

For now, sanctions are likely to stay targeted and may prompt a modest decline in trade. The Biden administration has not enforced existing US sanctions on Iran, so an expanded sanctions effort may simply be moot.

Jess

About the author: Jess Henley began his career in client relations for a large manufacturer in Huntsville, Alabama. With several years of leadership under his belt, Jess made the leap to brand communications with Bizwrite, LLC. As a senior copywriter, Jess crafts compelling marketing and PR content with a particular emphasis on global energy markets and professional services.

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