U.S. sanctions against Iran generate uncertainty in the oil market

Iranians burned US dollar bills and American flags to reject Washington’s sanctions against Tehran

Iranians burned US dollar bills and American flags to express their discontent with Washington’s sanctions against Tehran. The sanctions, which became effective on Monday (06/11/2018), generated international controversy and uncertainty in the oil market.

Iran's oil trade, banking activity, and transportation sector will be affected by the measure applied by the Trump administration. In addition, there is the threat of imposing more sanctions to "stop their illegal policies". For its part, Tehran denounced an "economic war" that it is willing to fight.

These sanctions are mainly focused on attacking Iran's first source of income: its oil exports. Oil revenue accounted for almost 14 percent of the Islamic nation’s Gross Domestic Product (GDP) in 2016, according to the World Bank. On the other hand, Iran produces approximately 3.7 million barrels per day that it would cease to supply to the international market.

Uncertainty is taking over the oil market thanks to Washington's sanctions against Tehran. The outlook is difficult to forecast in the midst of the global economic context that is currently occurring.

Uncertainty over oil prices

At first, some believed that the rise of oil demand would exceed existing supply, thus increasing prices over the coming months. On the other hand, production from the United States, Russia, and Saudi Arabia is nearing historic highs and could make up for Iran’s absence, as well as shortfalls in Venezuela and Libya, which output continues to rapidly decrease.

Given the forecasts of a possible increase in oil prices, the United States left an open window for Iranian exports to Taiwan, India, China, Japan, South Korea, Turkey, Greece, and Italy. Although sales will decrease.

In this context, another important factor is a weaker than expected economy. This situation seems to lead to pressure on crude prices, which could go down to around $60 per barrel.

Another cornerstone of these measures has to do with the financial sector. 50 Iranian banks and their subsidiaries would be out of reach from abroad due to the disconnection with the United States banking system.

These events have sparked outrage in Iran and the international community.

Many nations have spoken against the sanctions 

The first to raise his voice against the U.S. measure implemented on Monday was Iranian Minister of Foreign Affairs Mohammad Javad Zarif, who stated that the sanctions were an “indiscriminate attack”. The minister added that the sanctions were counterproductive for the U.S. government since several world powers opposed the measure.

In the meantime, Spain’s Minister of Foreign Affairs Josep Borrell also spoke against the U.S. decision. “Unilateral sanctions are a new and serious mistake,” he said.

Russia also supported Iran, as the country’s Minister of Foreign Affairs Serguèi Lavrov stated that “U.S. sanctions against Iran are absolutely illegitimate. It is hardly permissible to pursue a policy based on ultimatums and unilateral demands in our time”.

In this case, Moscow warned that despite Washington’s sanctions against Tehran, it will do “everything necessary” to preserve cooperation with this nation.

“We will do everything necessary to preserve and expand international trade and economic and financial cooperation with Iran despite the U.S. sanctions. We must not allow such a significant achievement of international diplomacy to collapse at the whim of just one nation, which openly violates the norms of international law,” Lavrov stated.

On a similar note, the rest of the nations that signed the 2015 nuclear pact with Iran affirmed that they would not comply with the measures against the Islamic nation. This means that China, United Kingdom, France, and Germany also plan to continue relations with Tehran.

A spokesperson for British Prime Minister Theresa May confirmed that the United Kingdom regrets these sanctions and will maintain trade with Iran.

"We continue to fully support expanding our trade relationship with Iran and encourage UK businesses to take advantage of the commercial opportunities that arise," they informed.

Clash between the United States and Iran

The United States intends to change Iranian policies regarding the cancellation of its nuclear program. In detail, the North American nation argues that Iran is not complying with the provisions established in the pact, despite the fact that the rest of the signatories do not support this claim.

"The Iranian regime has a choice. It can either do a 180-degree turn from its outlaw course of action and act like a normal country or it can see its economy crumble," Secretary of State Mike Pompeo said at a press conference.

Pompeo spoke about possibilities for negotiation and indicated that he hoped to reach a new agreement with Iran.

Just hours before, Iranian President Hassan Rouhani stated that Iran would continue with oil sales despite the sanctions. He added that the country will fight against the “economic war” unleashed by Trump.

“The United States wanted to reduce our oil sales to zero, but I announce that we will proudly bypass your illegal, unjust sanctions,” he affirmed.

Given these reactions from international players, analysts do not believe that Iran will have to buckle to U.S. pressure. They expect Iran to maintain trade relations in the short term.

“The increasing pressures on Iran will not change the behavior of the regime any time soon,” said Denis Ross, a former U.S. official working at the Washington Institute for Near East Policy.

U.S. sanctions against Tehran also affect more than 200 people, ships in the maritime sector, Iran Air airlines, and over 300 entities, individuals, and Iranian companies’ affiliates.

For more information, check Energía16

See also: The U.S. breaks national production record by exceeding 11 million bpd

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