US ties Iran sanctions escalation to oil price: Update

Updates throughout.

The US policy of driving Iranian crude exports to zero will have to take into account complications from the crisis in Venezuela and the need to keep oil prices stable, State Department special Iran envoy Brian Hook said today.

"As you have heard (President Donald Trump) say after we have done the eight oil waivers, we need to have a campaign of maximum economic pressure on Iran," Hook said at the IHS-CERAWeek conference in Houston. "But he also does not want to shock the oil markets. He wants to ensure a well-supplied and stable oil market."

The State Department in recent months sounded upbeat about its ability to keep oil prices stable in the aftermath of sanctions in Iran. It said it plans not to renew the waivers granted to China, Greece, India, Italy, Japan, South Korea, Taiwan and Turkey to continue buying Iranian crude when they expire on 3 May.

But there are some signs of doubt at the department about the challenges of maintaining balance. The law underpinning the US sanctions requires that the administration certify an adequately priced oil supply before taking that step.

"When you have a better supplied oil market, it enables us to accelerate the path to zero," Hook said. "But we also know there are a lot of variables that go into ensuring a well-supplied and stable oil market, for example, the crisis in Venezuela."

Preliminary Argus tracking data put Iran's crude and condensate loadings at around 1.48mn b/d in February, down from around 2.4mn b/d in the middle of last year. Venezuela's oil production was already falling before the US imposed sanctions on state-owned PdV on 28 January. The decline accelerated since then, with output dipping below 1mn b/d even before a nationwide blackout on 7 March all but shut down oil industry operations.

"We are aware that our diplomatic and economic pressure, the timing and the pace of that affects Venezuela's oil industry," Hook said. He added that he works closely with State Department special Venezuela envoy Elliott Abrams, who oversees the enforcement of US sanctions on Venezuela.

"Abrams knows my work, I know his work, and so we continue to balance our national security goals with our economic interests," Hook said. "There is no other industry that has so many variables going into it than the oil market. We track what is happening in Libya, Venezuela, Iraq, Kuwait, working with the Saudis, so that will continue. We are pleased how that has worked out so far."

Hook recounted the conditions ahead of the imposition of sanctions last November.

"Saudi Arabia increased production last year, so did the US and other countries, when we were taking off a significant amount of Iran exports, and that enabled us to balance and ensure a stable and well-supplied oil market during that period," he said.

US crude output is still growing — the Energy Information Administration (EIA) projects it to average 12.3mn b/d in 2019, up from 10.95mn b/d last year. But in a reversal of policy from late last year, Saudi Arabia and other Opec and non-Opec producers are implementing a 1.2mn b/d production cut in January-June.

The Opec production cut is in part a response to being caught off guard by the US' sanctions on Iran. Washington asked Riyadh and other Mideast Gulf Arab states to increase output after pledging to reduce Iranian exports to zero, only to grant waivers to Tehran's top customers.

"I have met with Khalid al-Falih a number of times last year when we were taking off a lot of oil, wanting to ensure we are doing this in a responsible manner," Hook said — including a meeting on the sidelines of the Vienna meeting in December, where Opec decided to implement output cuts.

Hook would not discuss ongoing consultations with Riyadh and other Opec members, and he would not say whether the US will provide them with advance knowledge of its sanctions decision. "We do not preview exemptions or non-exemptions."

Negotiations with the eight recipients of US sanctions waivers are ongoing, assistant secretary of state Frank Fannon said yesterday, adding that "I have nothing to report."

Hook said the latest EIA Short-Term Energy Outlook, released yesterday, forecast a slight excess of global liquids production over demand but added that "those are projections."

Hook said Trump will make the final decision on Iran sanctions waivers.

"He has expressed views about the price of oil, as you have seen on his Twitter account. This is something he follows very closely. He has made his views known to Opec a number of times."