The Iranian sanctions are now in place, but it appears that waivers granted raise questions to whether the sanctions will have any major impact on oil supply. While the Iranian economy is already tanking, the inability of the U.S. to find alternative supplies for buyers of Iranian crude has forced the U.S. to allow the buyers to continue to buy supply from Iran. The United States said it will temporarily allow eight importers to keep buying Iranian oil assumed to be China, India, South Korea, Turkey, Italy, the United Arab Emirates and Japan and Taiwan.

The real reason the U.S. must do this is that winter is coming and many of these countries are short of heating oil and other heavy distillate. There is also a realization by the Trump administration that there is not a lot of extra oil in the global marketplace. Even as Russia, the United States and Saudi Arabia – in October rose production above 33 million bpd for the first time, up 10 million bpd since 2010, the oil to meet winter demand is still tight and they can’t afford to lose those Iranian barrels right now. Still, Secretary of State Michael Pompeo had told Fox News the U.S. moves have “had an enormous impact already.” Iranian crude oil exports have already been reduced by over 1 million barrels a day and will continue to fall.

Oil is also feeling pressure from the stock market, as the Trump administration is downplaying the odds of a U.S. China trade deal. Fears of slowing demand is why the market fails to react to current tightening market conditions. While US producers have raised output to 11.2 million barrels, there are already signs that may not continue as the price break wants to allow continued increases in production. Baker Hughes reported that the U.S. oil drilling rig count fell by 1, the first drop in four weeks. If the price of oil does not stabilize, we will see a further drop in the U.S. rig count. 

For oil and oil products we believe the correction is getting overdone. While the market is still shocked that the Trump Administration granted waivers, the market is still tight regardless. Spare oil production capacity and floating storage is near historic lows and demand is still buoyant.