From November 4th onwards, Donald Trump expects all nations to cut their oil imports from Iran. The announcement has generated uncertainty in the markets, which is reflected through the recent slump in the WTI-Crude index. Oil exports are crucial to Iran; they are the largest supplier of oil to many developing nations such as India and China, and crude oil and natural gas make up 82% of Iran’s export revenues (Trading Economics, 2018). Iran’s crude exports revenues are estimated to be around $ 27.5B. The warning issued by Trump to other countries will lead to this number significantly decreasing. The consequences of the sanction will be apparent on the markets and the Iranian economy.
As oil is an integral part of Iranian exports, the sanctions will induce a current account deficit for Iran. At present, Iran has an extremely healthy current account balance exporting 79% more than they import. If the sanction is enacted as intended by the Trump administration, then that percentage will drastically change. There will be unemployment in the export industry, lower aggregate demand in the economy, and a reduction in government revenue. However, the sanction has a large positive economic advantage as well. The reduction in the exports of the country, should help combat the soaring double-digit inflation. According to CNBC, though, Iran is selling more and more oil just before the deadline.
This rush to sell and produce oil as quickly as possible will increase the short-term supply of oil in the market. This should lead to a further fall in the WTI-Crude Index. Another factor which may cause a continuous fall in oil prices is the decision to increase oil production by three members of the OPEC (UAE, Syria, and Libya). More and more oil production without sustainable demand is a cause for concern. Acquiring such sustainable demand will be a challenge for Iran.
India and China are the biggest buyers of Iran’s oil. As is emphasized by the CEO of Petro-Logistics (Daniel Gerber): “While Chinese and Indian purchases of Iranian crude in April represented slightly over half of all Iranian crude exports, this is likely to reach three-quarters in October” (CNBC, 2018). While India has been granted a sanction waiver, allowing it to continue its purchasing of oil without a cap, China hasn’t had the same luck. China has, however, pledged to keep importing oil from Iran despite warnings from the US. This may worsen the pre-existing tension between China and the United States. If the United States retaliates by imposing more tariffs or sanctions on China, then it will leave a sizeable negative footprint on the global markets. There already seems to be a strong bearish sentiment on the oil markets.
The market can stabilise back to their median in the long-run if China is granted a sanction waiver, Iran can sell its oil on a discount to other developing nations without upsetting OPEC, investors begin purchasing oil contracts during the slump in hopes of capital gain, and if an unexpected change in an exogenous factor creates a sudden burst of demand for oil.