US sanctions threat puts Iranian oil exports in peril; prices hit multi-month high

Amid geopolitical concerns stemming from escalating anti-government protests in Iran, oil prices continued their upward trend, marking a fourth consecutive session of gains during Asian trading on Tuesday due to fears of potential supply disruptions.

Widespread anti-government demonstrations, marked by significant violence and reported heavy casualties due to a security force crackdown, are currently impacting Iran, a major OPEC producer. 

In response, US President Donald Trump has issued a warning, suggesting potential military action should Iranian authorities persist in using lethal force against the protesters.

At the time of writing, the price of West Texas Intermediate crude oil was at $60.60 per barrel, up 2.2%, while Brent was at $64.95 a barrel, up 1.7%. 

The WTI benchmark hit a one-month high, while the Brent contract reached its highest point in over seven weeks during the previous trading session.

Massive violence is being employed by the Tehran authorities in response to the rapidly escalating situation in Iran. 

Protests gain momentum, Trump issues warning

Nationwide protests against the regime are quickly gaining momentum. The protests have reportedly resulted in several hundred deaths. 

Meanwhile, Trump has pledged support to the protesters and issued a threat to the regime, mentioning “very strong options” without specifying their nature. 

Initially, Trump announced secondary tariffs of 25% targeting countries that conduct business with Iran, including the purchase of Iranian oil.

“The betting markets are speculating on a US military strike against Iran in the next ten days,” Carsten Fritsch, commodity analyst at Commerzbank AG, said in a report. 

Targeting oil infrastructure could also deprive the regime of revenue from oil sales.

The recent surge in Brent oil prices—over 7% since last Thursday, reaching $65 per barrel—suggests the oil market is factoring in potential supply disruptions from Iran, Fritsch said. 

This follows a Bloomberg survey indicating Iran’s oil production was just over 3.3 million barrels per day in December.

Chinese refineries have become the primary purchasers because Western sanctions are targeting the ships that make up the shadow fleet.

“Whether this secondary tariff threat is sufficient to push China away from Iranian oil remains to be seen,” Warren Patterson, head of commodities strategy at ING Group, said. 

China was previously undeterred by the threat of secondary tariffs and continued to purchase oil from Venezuela and Russia.

Patterson said:

In addition, with the US and China having come to a trade truce, we question whether the US would want to rock the boat once again with additional tariffs on China.

Iran’s exports in danger

Iran’s oil exports reached levels of 1.8-1.9 million barrels per day in the months before December, according to Bloomberg data, although they dropped slightly to just under 1.4 million barrels per day in December itself.

The potential, at least temporary, loss of these volumes would correspondingly tighten the supply in the oil market, according to Commerzbank’s Fritsch.

However, this could still be compensated for by an increase in production by other OPEC countries. In addition, the oil market is currently oversupplied anyway.

Adding to this risk, Iran has frequently threatened to close the Strait of Hormuz to shipping. 

Such a blockage would be significant, as approximately 20 million barrels of oil—or about a quarter of the world’s daily seaborne oil supply—pass through this vital waterway every day.

“Such a quantity could not be offset by resorting to spare production capacity, especially since this would also be cut off from the oil market if the strait were blocked. The price of oil would then rise significantly,” Fritsch added. 

Regime change in Iran possible?

Should the protests succeed in overthrowing the regime in Iran, US sanctions would probably be lifted soon after.

Because Iran is not subject to the OPEC+ production quotas, its oil output is expected to swiftly climb back to the highest possible capacity.

Iran’s current production capacity, estimated by Bloomberg to be 3.8 million barrels per day, suggests the potential for a production increase of approximately 500,000 barrels per day.

In this scenario, the existing oversupply in the oil market would put downward pressure on oil prices, Fritsch said.

The question is whether OPEC+ would respond by partially reversing its recent production increases or only refrain from further expanding production.

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