Drive Iranian crude oil exports to zero. Guarantee safe passage in the Strait of Hormuz.
Those are two goals the White House says it stands by. But can both be accomplished at the same time?
The shift in US policy towards Iran under President Trump has always run the risk of blowback as Washington tightens the screws on Tehran economically and militarily.
One typical scenario imagined Iran blocking the Strait of Hormuz in response, cutting off the route that supplies a fifth of the world’s oil supply.
A pair of oil tanker attacks, including last week’s incident in the Gulf of Oman, which US and Saudi officials blamed on Iran, marked a step in that direction.
The Iranian military denied the allegations, saying if it wanted to block the Strait of Hormuz it would do so “fully and publicly.”
Strait of Hormuz
Image Credit: Google, SIO, NOAA, US Navy, NGA, GEBCO, Landsat/Copernicus
This week the Pentagon said 1,000 more troops would be sent to the region. A US military drone was then shot down by an Iranian missile over the Strait of Hormuz.
One thing that is clear is the impact that tougher US sanctions have had on Iranian crude inventories.
The amount of crude in storage at Kharg Island -- Iran’s main export terminal -- has risen steadily since waivers expired early May that allowed eight countries to buy Iranian crude.
We’ve highlighted this trend before (click here and here), which has continued to the point where there isn’t much spare capacity left.
Kharg Island crude storage as a percentage of capacity reached 81% the week of June 13, the most ever according to Ursa measurements going back to April 2017.
What this means is Iranian crude exports have likely fallen faster than production rates.
Reuters estimates Iranian exports averaged 400,000 bpd in May, down from just under 1 million bpd in April and 2.5 million bpd in April 2018.
With storage tanks filling, Iran must cut back production or find more customers willing to risk falling under US sanctions, if caught.
Where might Iran turn?
One reliable customer had been Syria, until the end of 2018 when Washington strengthened measures aimed at stopping the flows.
Then came a news report last month saying shipments from Iran to Syria had resumed.
A Suezmax ferrying Iranian crude delivered 1 million barrels to the Syrian port of Baniyas, the report said, citing TankerTrackers.com and ClipperData.
Interestingly, we’ve seen crude inventories at Baniyas increase since mid-April, reversing a period of draws around the time supplies stopped arriving from Iran.
Another possible destination for Iranian exports is China. In 2014, during the previous round of sanctions, Iran stored oil in Dalian, the Chinese port where there are “bonded” tanks.
Flows from Iran to Dalian picked up sharply in October 2018, a month before the US reimposed sanctions, translating into higher inventories.
After a sharp drawdown late February/early March, Dalian inventories were flat until builds began mid-April and have continued since.
Even if Iran maintains some exports, the impact of sanctions has been significant, leaving a supply gap for others to fill.
Recent crude inventory draws suggest some of Iran’s Gulf rivals may be stepping up.
For the last four weeks, inventories have fallen at Ras Tanura (Saudi Arabia) and Ahmadi, (Kuwait), a sign of outward flows.
Will this continue? Not if refiners judge the situation as too risky and decide to cut back on Middle East supply.
A survey earlier this month by Platts found that Asian refiners planning to reducing imports of Middle East crude in the second half of this year, citing security concerns.
We’ll continue to keep a close eye on developments in the Strait of Hormuz and the impact on the oil supply chain.