U.S. President Donald Trump speaks during an announcement in the Diplomatic Room of the White House in Washington, D.C., U.S. (Photographer: Al Drago/Bloomberg)

Oil Rises as Trump Tells Buyers to Cut Back on Iranian Crude

(Bloomberg) -- Oil rose to a three-year high after the U.S. told buyers of Iranian crude they have six months to curb their purchases or face tough penalties.

While the full impact of President Donald Trump’s decision to withdraw from the nuclear deal is still unclear, the re-imposition of far-reaching sanctions is expected to start reducing shipments from the Middle East’s third-largest producer. The U.S. Treasury said its intention was to curb Iran’s crude sales, offering potential exemptions from penalties only for nations that “substantially” decreases their purchases.

Price movements reflected the market’s uncertainty. Crude settled lower on Tuesday after Trump’s announcement, then rallied in after-hours trade and into the Asian morning as traders digested the news. Futures were 2.8 percent higher in New York on Wednesday.

“We expect to see a sharp drop in purchases of Iranian crude oil from all sides over the next couple of months, just as crude markets reach peak seasonal tightness,” analysts from JBC Energy GmbH said in a note. “Estimates vary from a couple of hundred thousand barrels a day -- essentially token compliance from some U.S. allies in East Asia to visibly reduce their Iranian crude imports -- to more than 1 million.”

Oil Rises as Trump Tells Buyers to Cut Back on Iranian Crude

Japan, the sixth-largest buyer of Iranian oil according to tanker-tracking data compiled by Bloomberg, said it would seek a sanctions exemption from the U.S. The Middle Eastern producer’s other major customers have yet to confirm their intentions. MUFG Bank said nations such as China, India and Turkey, which oppose America’s move, could seek to continue their purchases.

West Texas Intermediate oil for June delivery rose as much as 3.1 percent to $71.17 a barrel on the New York Mercantile Exchange and traded at $71 at 9:25 a.m. London time. Prices settled 2.4 percent lower on Tuesday. Total volume traded Wednesday was about 59 percent above the 100-day average.

Brent for July settlement climbed as much as 3.1 percent to $77.20 a barrel on the London-based ICE Futures Europe exchange. Futures slid 1.7 percent to $74.85 a barrel on Tuesday. The global benchmark crude traded at a $6.02 premium to July WTI.

Futures for September delivery on the Shanghai International Energy Exchange rose 1.3 percent to 465 yuan a barrel, climbing for a third day. Volumes for the contract are at the highest level since trading began on March 26.

Prices were also helped on Tuesday after the American Petroleum Institute was said to report a 1.85 million-barrel drop in nationwide crude stockpiles last week. The oil hoard likely increased by 1 million barrels last week, according to the median estimate of analysts surveyed by Bloomberg ahead of the release of government data on Wednesday.

Effective Immediately

The sanctions “effectively” go into place immediately, U.S. Treasury Secretary Steven Mnuchin said after Trump announced the withdrawal. In a document accompanying the announcement, the Treasury gave an unequivocal “Yes” to the question of “Will the United States resume efforts to reduce Iran’s crude oil sales?”

Oil Rises as Trump Tells Buyers to Cut Back on Iranian Crude

Japan plans to find out whether its current import volume is enough to get an exception or whether it needs to further reduce purchases, Takashi Yamada, director of petroleum policy at Ministry of Economy, Trade and Industry, said by phone. The nation bought 177,000 barrels a day from Iran in 2017, lower than levels before previous sanctions were imposed, he said.

Trump’s decision also raised questions about the future of the production cuts deal between the Organization of Petroleum Exporting Countries and allies including Russia. The nations pledged last month to continue their curbs until the end of the year. On Tuesday however, Saudi Arabia promised to work with other OPEC members to “mitigate” the impact of any supply disruptions. Analysts including FGE have questioned whether the group would fill the gap left by Iran.

“I don’t think Saudi Arabia or OPEC will step in and contain prices at the moment,” said Daniel Hynes, a senior commodities strategist at Australia & New Zealand Banking Group Ltd. “I don’t think we are near those levels when it will act. I suspect they want to see $80 a barrel.”

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