As the oil market grapples with the current and potential effects of the Gaza war, a new significant concern has emerged. U.S. sources indicate that the Biden Administration might soon impose stricter sanctions on Iran. Such a move would represent a marked shift from Washington's recent rapprochement with Tehran.
Over the past few months, an increasing number of commentators in Washington have criticized the Biden Administration's decision to release $6 billion in frozen Iranian assets as part of a prisoner exchange with the Khamenei regime. While previous calls for action have yielded little response, events like the Hamas actions on October 7, the ongoing conflict between Israel and Hamas, and the widespread belief that Iran and its allies are fuelling instability in the Middle East have reinvigorated those advocating for sanctions on Iran.
Given the evidence suggesting that senior officers of the IRGC back attacks by Iranian proxies in Yemen, Iraq, Syria, and Lebanon against U.S. military personnel and civilians, it's becoming increasingly difficult to justify releasing funds to Iran. Moreover, the unwavering support shown by Iran’s religious leader Khamenei and President Raisi for Hamas and threats of direct engagement if the conflict extends to Lebanon is compelling Washington to reassess its stance. Analysts expect that new sanctions could be slapped on Iran very soon, focusing on the country’s largely illegal oil and gas exports.
The imposition of renewed or even more stringent sanctions on Iran's hydrocarbon sectors and exports would have significant repercussions. The current supply-demand balance is tight, and both OPEC and other experts anticipate further demand growth. If all other factors remain constant, this would result in price surges, potentially pushing prices well above the $100-110 per barrel mark.
Re-establishing a strict sanctions regime, which had been eased after Biden's election, appears more feasible now than ever. A key reason for the lack of widespread panic is OPEC+'s decision to cut several million barrels of daily production. As a result, the global spare production capacity stands at around 5 million barrels, primarily held by countries like Saudi Arabia, Russia, and the UAE. Rolling back the OPEC+ production cuts could benefit importers and stabilize oil prices in the desired range, as preferred by OPEC's most influential member, Saudi Arabia.
A renewed sanctions framework would significantly burden Iran's fundamentalist regime by depriving it of its primary revenue source: hydrocarbon sales. Implementing strict sanctions globally would likely pressure Iran to meet other demands, particularly in refraining from intervening in the Israel-Hamas and Hezbollah conflict. Some might argue that placing financial constraints on the Iranian Revolutionary Guards (IRGC) could be a severe setback and shouldn't be underestimated. Simultaneously, new sanctions might disrupt or even sever financial ties between Iran and its regional proxies, a move that many Arab nations would likely welcome.
Some analyses suggest that a renewed sanctions approach could focus on fully enforcing existing sanctions, particularly those targeting Iran’s primary clients in Asia. Until now, the U.S. has granted waivers for most Iranian exports to China and India, providing Tehran with a crucial financial lifeline. By exerting pressure on India and China, Washington could achieve multiple objectives simultaneously: reducing Iran's revenue, compelling Asian countries to adhere to U.S. directives, and prompting them to seek alternative supply sources, potentially boosting U.S. hydrocarbon sales.
Arab nations, notably Saudi Arabia and the UAE, might publicly remain neutral on such a U.S. initiative. However, behind closed doors, there would likely be some satisfaction. Weakening Iran—even with restored diplomatic relations—would not be seen negatively, and the potential disruption of funding to Iranian militias in the region would be a welcome development.
Recent developments in Washington indicate that discussions and implementation of new sanctions on Iran are imminent. US senators from both parties are already framing new sanctions regimes, as noted by Republican Senator Joni Ernst. This forthcoming sanctions bill will be co-led by Democratic Senator Richard Blumenthal. The election of Republican Mike Johnson as Speaker of the House further paves the way for more stringent sanctions in the near future. A known critic of the Trump administration, Johnson has been proactive in advocating for a strong stance against Iran.
For Iran, the prospect of new sanctions, primarily if they're implemented globally and target its primary clientele, couldn't come at a worse time. The country's financial health remains fragile despite a growth in Iran’s oil exports to Asia over the past year. As stated by Davoud Manzour, the head of the Iranian Planning and Budget Organization, on October 23, only "approximately 70 percent" of the government's projected revenues were realized in the first seven months of the current Persian calendar year (March 21-October 23). Contrary to official Iranian claims that oil exports have exceeded 1.8 million barrels per day, Manzour emphasized that actual oil exports have failed to reach the budgetary target of 1.5 million barrels daily. Furthermore, the International Monetary Fund (IMF) estimates that Iran’s foreign currency reserves will reach $21.1 billion in 2023. If new sanctions are implemented, they'll hit the Iranian economy hard. Without sanctions, the IMF projects reserves of $24.3 billion for 2024.
Given the circumstances, it seems highly probable that Iran will face US sanctions. There's a strong likelihood that the EU will either back these sanctions or introduce its regime. The mounting evidence of Iran’s involvement in the ongoing crisis grows daily. Political shifts in the US and upcoming EU elections could serve as catalysts for such measures. While markets need to gauge the potential impacts, volatility is expected to rise sharply. Concurrently, sanctions could serve as a leverage point against Israel. In pressing Washington to act against Iran, the Israeli leadership recognizes the implications and potential benefits.
By Dr. Cyril Widdershove for Oilprice.com