Tightened U.S. Ban on Iran Rattles Oil World

China likely to keep getting Iran oil; Saudi response unclear

By Benoit Faucon and Summer Said, WSJ

Waivers granted to countries including China, India and Turkey that allowed imports of Iranian oil would end May 2, U.S. Secretary of State Mike Pompeo said. The move, part of the Trump administration’s effort to drive Iran’s exports to zero, surprised buyers and others who had been told by State Department officials in recent weeks to expect a renewal of exceptions.

The U.S. had previously granted eight countries 180-day waivers, allowing them to continue buying Iranian crude despite the U.S. sanctions that began last November. The waivers stipulated that each country had to take steps to reduce purchases and move toward ending imports from Iran.

The Trump administration’s announcement comes as Brent crude—the global oil benchmark—and West Texas Intermediate, the U.S. oil standard, have soared by more than 30% since the start of the year, a rise bolstered by production cuts from the Organization of the Petroleum Exporting Countries and its allies, including Russia.

The collective agreed late last year to curb crude output by 1.2 million barrels a day for the first half of the year. The absence of waivers could remove over 1 million barrels a day of Iranian supplies from the global market. In response, international oil prices jumped 3% to $74 a barrel in early trading Monday.

The withdrawal of waivers prompted Saudi Arabia, the world’s largest oil exporter, to reject an immediate production boost to make up for any shortfalls in the market that might occur.

“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,” said Saudi Energy Minister Khalid Al-Falih in a statement.

Mr. Pompeo said he carried extensive discussions with Saudi Arabia and the United Arab Emirates—two Middle East allies—to “ensure sufficient supply.”

Saudi officials said the kingdom had committed to increase output to offset Iran’s losses if needed. But it has not committed to a time frame or amount, they said.

Riyadh remains wary of previous calls to boost output by the Trump administration, one of which resulted in a price crash when the U.S. reneged on a pledge last fall to ban Iran oil exports—without waivers. The kingdom also wants prices to remain high to cover an expanding budget, according to people familiar with the matter.

For now, Saudi Arabia and Iran—regional foes—agree that it is too early to say how much and how quickly Tehran’s oil could be hit by the ban.

China, one of Iran’s largest oil customers, had received waivers from the ban in the past. Now the country says it will resist the embargo. India, another of Iran’s top buyers that had previously been granted waivers, said it will begin looking for other sources of crude.

China, which buys half of Iran’s exported oil, won’t respect the United States’ unilateral sanctions on Iran, foreign ministry spokesman Geng Shuang said Monday in Beijing.

Even if it wanted to stop buying Iranian oil, China would need months to wind up existing commitments, an Iranian oil official and a China oil company adviser said. China state-run Sinopec gets 105,000 barrels a day in repayment for a $2 billion investment in an Iranian field, which is pre-arranged at least three months in advance, an adviser to the company said.

Iran also holds substantial amounts of condensates in leased storage in the Chinese port of Dalian, said Sara Vakhshouri, a former official at the National Iranian Oil Co.

But the State Department expects China will zero out imports from Iran because of how well-supplied the markets are, the department’s Iran special envoy Brian Hook said in a conference call.

The U.S. decision to end Iran oil exports could threaten Saudi exports as well.

On Monday, a commander in the hard-line Islamic Revolutionary Guard Corps. vowed to interrupt the flow of oil going through the Persian Gulf’s Strait of Hormuz—the shipment route used for most oil shipments from both Iran and Saudi Arabia.

“If we are barred from using [the Strait,] we will close it,” the IRGC Naval Forces commander Alireza Tangsiri told Iranian state TV network Al Alam. “We will defend our honor and wherever it comes to defend Iran’s rights, we will retaliate.”

The consensus in Iran’s political circles is that if the Islamic Republic can’t sell their crude, “no-one else can,” said the Iranian oil official. “It’s a very dangerous situation.”

Concerns over the loss of Iran oil—and possible threats to other Persian Gulf suppliers—come amid a conflict in key African exporter Libya and separate U.S. sanctions on Venezuela.

“The White House has very little room for error if it wants to keep prices in check now that two OPEC countries are under sanction and a third is facing a civil war situation,” said Helima Croft, the chief commodities strategist at Canadian broker RBC. The success or failure of Mr. Trump’s strategy will be “riding on the strength of the bilateral relationship with Saudi Arabia.”

India had also received waivers from U.S. sanctions to import Iranian oil in the past. The Ministry of External affairs declined to comment Monday. Cutting Iranian imports would be difficult, but New Delhi would likely abide by the U.S. rules, a top official in the prime minister’s office said. It would likely look for alternative crude sources, the person said.

The S&P BSE Energy Index closed down 2.73% Monday with state-run Hindustan Petroleum losing 6.11%.

The Turkish government condemned the U.S. decision to lift the sanctions waivers, saying it would harm the Iranian people and fuel tension in an already volatile region.

The U.S. decision “will not serve regional peace and stability” Turkey’s Foreign Minister Mevlut Cavusoglu said in a tweet. “Turkey rejects unilateral sanctions.”

Before the U.S. sanctions were put in place, Turkey imported about half its oil from Iran.

Last year, Mr. Erdogan said Turkey would ignore the U.S. embargo on Iranian oil but Turkish business leaders have generally said they would comply with it to avoid getting caught in U.S. crosshairs.

—Aresu Eqbali and Timothy Puko contributed to this article.