A change of administration’s in Washington has raised a lot of questions about a foreign policy overhaul across a range of issues.
The lengths to which President Biden goes to reverse or stay the course on his predecessor’s aggressive use of sanctions targeting oil exporters will have implications for the global oil market. A strategy reset is clearly underway, but it is not clear that a rapid thaw will occur between Washington and some countries targeted by the Trump administration.
A return to the nuclear deal?
The two most important countries in question are Iran and Venezuela, both of which were heavily sanctioned by the Trump administration, which strangled their respective economies and choked off oil exports.
While the Biden administration immediately began reversing or overhauling many Trump-era policies, the sanctions regime is trickier to undo.
But while the Biden administration immediately began reversing or overhauling many Trump-era policies, the sanctions regime is trickier to undo. Indeed, in the first few weeks of the Biden administration, both U.S. and Iranian officials have approached a return to the Joint Comprehensive Plan of Action (the Iran nuclear deal) with caution and skepticism. The U.S. government has said Iran needs to come back into compliance with the terms of the deal, while Tehran points out that it was the U.S. that withdrew in the first place and imposed sanctions. Each wants the other to act first.
The Biden administration has prioritized aligning its policy with that of its European partners that are party to the deal. As ClearView Energy Partners details in a February 8 report, working with the EU on the Iran deal serves to both repair the damaged transatlantic relationship while simultaneously laying a path to reviving the nuclear deal in a constructive way.
That doesn’t mean that the U.S. and Iran will find common ground on these obstacles anytime soon. “Iran was hoping for a quick resolution and withdrawal of the US sanctions, to push more oil in exports, a development that now seems to need more time to happen than Iran hoped. And not bringing back Iranian oil is also a support to prices,” Paola Rodriguez Masiu, Vice President for Oil Markets at Rystad Energy, said in a February 8 statement.
Iran announced in January that it was resuming uranium enrichment to 20 percent purity in defiance of the 2015 accord.
There are many pitfalls that could deal setbacks to negotiations. For example, Iran announced in January that it was resuming uranium enrichment to 20 percent purity in defiance of the 2015 accord. Tehran could also escalate further in order to apply pressure on the U.S. government. That, in turn, could box in the American government if domestic Iran hawks in the U.S. pounce on any conciliatory measures attempted by the Biden administration. The familiar cycle of escalation then becomes difficult to unwind.
With that said, the Biden administration does seem intent on rejoining the nuclear deal. ClearView Energy Partners says it is a matter of “when” rather than “if.” But it might take some time. The “significant downside risks to crude from the U.S. lifting oil sanctions and re-entering the Joint Comprehensive Plan of Action (JCPOA) may not arrive before 2H2021, or even 1H2022,” ClearView Energy Partners wrote in a note on February 8. “We anticipate a phased process, with timing likely to reflect both the sequencing and scope of U.S. sanctions relief and Iranian compliance.”
In the meantime, Iran’s oil exports have “leaked” out despite the dragnet of U.S. sanctions. According to data from TankerTrackers.com, Iran’s oil exports doubled from around 0.5 million barrels per day (Mbd) in May 2019 to around 1 Mbd at the end of 2020. Early data suggests volumes continue to rise, but they will remain far below pre-2018 levels.
Venezuela’s “humanitarian” barrels
Like Iran, Venezuela was also decimated by U.S. sanctions. Oil exports collapsed, but as is the case with Iran, the objectives of the U.S. government – either wholesale surrender or regime change – were not achieved.
The Biden administration wants a rethink on Venezuela, but a shift in policy will be slow and incremental on this front as well. Upon taking office, Biden officials recognized opposition leader Juan Guaidó and denounced Maduro as a dictator, echoing the Trump policy.
However, one area of change could be allowing for the swapping of crude oil for refined products – the U.S. may permit Venezuela to export crude to India in exchange for gasoline, for example. “We continue to believe that the swaps could be restored early in the Biden Administration, despite official U.S. recognition of Guaidó as Venezuela’s head of state,” ClearView Energy Partners said in their report. Adding some evidence to that notion is news that Chevron and India’s Reliance Industries met with U.S. State Department officials in late January to discuss the matter.
“We certainly don’t expect any contact with Maduro anytime soon.”
Beyond that, there doesn’t appear to be any imminent change. Venezuelan President Nicolas Maduro said in January that he was willing to “walk a new path” with the U.S. But when recently asked about a change in policy, State Department spokesperson Ned Price said: “we certainly don’t expect any contact with Maduro anytime soon.”
A return of sanctioned barrels?
For now, Iran and Venezuela together have a few million barrels per day of oil production capacity sitting on the sidelines. Neither appears set to have U.S. sanctions removed in the short run. At the same time, Venezuela in particular would have serious challenges restoring lost oil production even if external obstacles were removed, owing to the decrepit state of infrastructure and its deep state of economic despair.
But both countries could see a trickle of oil shipped from their respective shores as the Biden administration de facto loosens its sanctions enforcement, even if there is not yet an official change in policy. In the past, this kind of “leakage” might move the global oil market in a non-trivial way. These days, however, there are much larger sources of volatility.
Look no further than OPEC+, which could decide in the next few weeks to unwind some of the production cuts put in place last year. That decision will have a much greater impact on the oil market than disrupted supplies from Iran and Venezuela, especially with U.S. sanctions not going away anytime soon.
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