Iran wavers: an in-depth analysis

Executive Summary

Writing about oil production and price is always delicate as many aspects are touched. The title of this document could easily be changed in: "Curious case of Iran Waivers" or, better "A storm in a teacup". Iran's total export is less than 3% of global production but 13.3% of the largest producer Saudi Arabia, BUT and above all, China is the largest importer and is the destination of 50% of Iran's exports.

While most western economies have already reduced to zero import from Iran, the "elephant in the room" is China as it imports almost 50% of Iran's production. We expect that the main consequence of this decision on waivers will impact the trade negotiations between the US and China. Secondary to this but equally important are the short term implication on the US equities.

The full story

For those who are still in the post-Easter mood and missed the latest headlines, the US administration via the Secretary of State Mike Pompeo announced that the waivers granted on October 2018 to eight countries allowing oil import from Iran will not be renewed.

Short term consequences

The immediate consequence of this decision is the fear of a restriction of supply, our thoughts immediately go to US inflation than to the price of real assets. An increase in US inflation expectation is, usually, supportive of tangible assets prices in the short term. (It is one of the stated aims of the US President to stretch the current cycle and equity bull market as much as possible. Ideally, we say, to the 2020 elections). The chain of cause and effect can be simplified as follows:

Eventually, a rise in the price of oil takes its toll on the real economy or, if inflation actually goes up, the FED will become more hawkish.

The left chart shows a simplification of the cause-effect chain of events. Both the time frame and the transmission mechanism is uncertain but, a first conclusion could be that short term this announcement could be supportive for risky assets like US equities.

The elephant in the room: a more detailed watch.

Iran's total export is less than 1.5% of global production, but 13.3% of the largest producer Saudi Arabia and, China import almost 50% of Iran's output.*

Iran exports have already plunged significantly since the historical peak in April 2018 (see attachments). Many countries have already substantially reduced or brought to zero import from Iran (see table on the left). Saudi Arabia pledged to ensure oil supply should Iran export collapse. Therefore, while we agree that turbulence in the marginal available quantity could have unexpected consequences, the main result of this decision is to bring another card to the table of the trade negotiations between US and China.


Trend of the price of Brent from 2018

Brent future curve. Live and 6 months ago

* Please note that an "unknown" category for 17% of total exports appeared in February this year.

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