On 11 June, the US State Department granted ‘significant reduction’ waivers to India, Malaysia, the Republic of Korea, South Africa, Sri Lanka, Turkey and Taiwan. That means the US has now effectively exempted all of the major importers of Iranian crude, with the exception of China, from the new sanctions.
As we do not expect the US to apply its new sanctions powers effectively on China, the result of this latest decision is to emasculate the potential direct impact of the new US sanctions, which would otherwise have become available from 28 June, in our view.
We believe that it is just possible that the waiver issuance was also connected with a move to reduce sanctions pressure on Iran ahead of the P5+1/Iran meeting (18/19 June) which might indicate improved odds of the negotiations being productive. However, the outcome of this next round of negotiations remains highly uncertain.
Despite rising concern among some OPEC members around the precipitate fall in the oil price, comments reportedly made by the Saudi Arabian oil minister, Ali al-Naimi, that OPEC’s current production target might need to be raised and the short time scheduled for the closed session meeting (1 hr) do not suggest to us that OPEC has prepared itself for firm action at this meeting. It remains to be seen what Saudi Arabia might say about its own production intentions but current production levels seem set to continue at least through July.
In our view, the market is being significantly over-supplied with oil and until that stops, the underlying pressure on price is negative. Reduced Iranian supplies could have been part of that solution, but US action reaffirms us in our non-consensus view that the new sanctions would prove comparatively ineffective.