Opec tempers response to end of Iran waivers:Correction

Corrects oil price in 8th paragraph

London, 23 April (Argus) — Washington is banking on Opec to ensure adequate supplies to global oil markets following its announcement to end waivers for Iranian oil exports as of 2 May, but Riyadh appears to be taking a more measured position than indicated by White House officials.

"In the next few weeks, the kingdom will be consulting closely with other producing countries and key oil consuming nations to ensure a well-balanced and stable oil market," Saudi oil minister Khalid al-Falih said in a 22 April statement.

In announcing the end to sanction waivers, US secretary of state Mike Pompeo emphasised that "both the kingdom of Saudi Arabia and the United Arab Emirates (UAE) have assured us they will ensure an appropriate supply for the markets," and added, "I can confirm that each of those suppliers are working directly with Iran's former customers to make the transition away from Iranian crude less disruptive."

President Donald Trump hailed the decision and reiterated Opec's support, tweeting "Saudi Arabia and others in Opec will more than make up the Oil Flow difference in our now Full Sanctions on Iranian Oil."

Senior State Department officials declined to detail what commitments Riyadh and Abu Dhabi made, citing "confidentiality of diplomatic discussions". But Washington insists that it has received sufficient guarantees from Riyadh and Abu Dhabi that they will make up any deficit in supply. "We have great confidence on where the market will be given the commitments that have been made," assistant secretary of state Frank Fannon said.

But in contrast to Washington's depiction of unqualified support from Saudi Arabia and the UAE to replace Iranian oil exports, several Opec officials told Argus that oil minister al-Falih's tempered comments reflected his view that more time would be needed to assess the impact on the market balance and that any response would be coordinated among its partners in the Opec and non-Opec alliance.

The discrepancies in statements between Washington and Riyadh caused concern among some members of the producer alliance, fearing Saudi Arabia and the UAE would heed Trump's demand for immediate production increases. But a repeat of last year, when Opec and non-Opec partners eased production constraints and ramped up supplies amid pressure from Washington and market fears of a shortfall as sanctions on Iran loomed, is out of the question this year. "No pre-emptive production increase will be repeated now. We need to assess the market balance before taking any decision," one Saudi source said.

Indeed, at the last Joint Ministerial Monitoring Committee (JMMC) meeting in Baku, participants roundly agreed that they had been wrong-footed by Washington last November and they would take a much more cautious approach in responding to the White House's decision on waiver renewals. The sharp increase in the group's production, combined with surging shale oil supply and the eleventh-hour reversal by the US to grant Iran sanctions waivers, proved to be financially very painful, with prices plunging from a high of $86/bl in October to $50/bl late last year.

The US announcement targeting zero exports yesterday also caught the oil market by surprise for the third time. Pompeo acknowledged just last month the difficulty in enforcing zero exports, given the Opec cuts and crises in Venezuela and Libya. As a result, the market, including Opec and many of Iran's customers in Asia, had expected waiver volumes to be reduced, but not cancelled ahead of the early-May deadline. Yesterday's surprise announcement will no doubt have left a bitter taste with some Opec and non-Opec producers, and only served to reinforce a more cautious approach.

Equally, while Washington announced that ending sanctions will "bring Iran's oil exports to zero, denying the regime its principal source of revenue", it is far too early to assess the actual loss of Iranian supplies from the market, Opec officials said. Both China and Turkey are expected to push back against full compliance with sanctions, unwilling to be seen as acquiescing to US demands. In reality, zero exports may look more like 300,000-500,000 b/d of shipments in the second half of the year.

Washington's decision to end waivers is just one issue that will now be factored into its assessment of the market balance when the JMMC meets on 19 May in Jeddah. The JMMC will review the latest supply, demand and stock data from the Joint Technical Committee as well as developments in crisis-ridden Libya and Venezuela.

"Jeddah is going to be crucial to really assess the market," one source said, but added, "no formal decision to amend the agreement will be made until the full ministerial meeting in June."

The official noted that the JMMC meeting is only empowered to make recommendations to member countries and added that any changes to the current production agreement will not be determined until the full ministerial meeting of Opec and non-Opec countries scheduled for 25-26 June in Vienna.

But with Opec production at five-year lows and output well below its target, there is plenty of leeway to raise output in May and June if there is more demand from Iran's customers without tampering with the existing production quotas. Total Opec production was down sharply in March on constrained Saudi production and involuntary losses in both Iraq and Venezuela. Production from the group's 11 members party to the agreement is running 500,000 b/d below the quota level, with compliance pegged at a strong 159pc in March, according to Argus estimates. Saudi Arabia has been producing below its official 10.3mn b/d this year by roughly 325,000 b/d on average from January-April. "If companies ask us for more [crude] in June we are able to supply it under the current agreement," one Saudi official said.