What a Biden presidency means for Iran and oil markets

If US sanctions are removed, Iran’s exports would bounce back quickly, as they did in the period of the JCPOA, starting in January 2016

FILE - In this July 14, 2015 file photo, an Iranian woman holds up a national flag as people celebrate a landmark nuclear deal, in Tehran, Iran. The race for the White House could mean another four years of President Donald Trump’s “maximum pressure” campaign of crippling sanctions. Or it could bring Joe Biden, who has raised the possibility of the U.S. returning to Iran’s 2015 nuclear deal with world powers. (AP Photo/Ebrahim Noroozi, File)
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Late in the Second World War, German cities were so ruined that Winston Churchill said new Allied bombing raids were merely “stirring the rubble”. American sanctions on Iranian oil seem to follow a similar principle. Should Joe Biden win tomorrow’s US presidential election, will the new Democratic administration want to undo these measures?

Last week, the US Treasury imposed new sanctions on Iranian oil minister Bijan Zanganeh, the oil ministry, the National Iranian Oil Company and other entities, a move that is largely redundant as they are covered by existing sanctions.

On Thursday, the US sold off Iranian oil worth $40 million that was taken in August from four ships destined for Venezuela.

In September 2018, just before the most stringent phase of the Trump administration’s “maximum pressure” campaign, Iran was producing 3.1 million barrels per day. Output has now dropped to 2 million bpd, mostly used domestically, although exports have probably been significantly understated.

For now, Iran has expanded the scope of its nuclear activities, but not so severely as to incite the US to respond beyond levying more, mostly similar, sanctions.

If Mr Biden wins, there will be an uncomfortable lame-duck period to January 20 when anything is possible – from the Trump administration ignoring Iran entirely to a flare-up of hostilities.

Mr Biden has indicated that the US under him would rejoin the “Joint Comprehensive Plan of Action” (JCPOA) agreement signed under President Barack Obama, as long as Iran continues to comply. President Donald Trump’s abandonment of the deal has increased its popularity as a Democratic totem of multilateralism and diplomacy.

However, it is impossible to ignore the last four years. A Biden administration will have a huge amount on its plate, foremost the pandemic and economic sustenance. When it can turn to the Iranian file, it will start from the current situation, in which Iran is under economic siege and the US does have trading chips.

Probably enforcement will be less zealous, and there could be some limited relaxation of sanctions, including waivers for countries other than China to import from Iran, in return for Tehran not exceeding the deal’s limits further. It is unlikely much more could be done before Iran’s June 2021 presidential elections.

After that, there could be deeper negotiations on a “more for more” deal, opening up to the Iranian oil sector and economy in return for curbs not just on the nuclear programme, but on weapons development and regional conflicts. Still, there will be much greater suspicion in Tehran, possibly a hardline president, calls for more solid American commitments, and no doubt a string of demands which can’t be granted, but will somehow have to be finessed, such as compensation for Iran’s losses over the past four years.

So, it is unlikely a renewed accord will be reached until late next year at best. The JCPOA took almost two years to negotiate. Undoing sanctions and reassuring Iran’s trading partners will be legally complicated.

However, if sanctions are removed, Iran’s exports would bounce back quickly, as they did in the period of the JCPOA, starting in January 2016.

Production of 2.8 million barrels per day in December 2015 had leapt to 3.6 million bpd by April 2016. The country’s fields have again been shut down in an orderly way.

It has some 50 million barrels of oil in tankers at sea, while onshore storage is near-full at more than 60 million barrels, enough to sustain an additional 1 million bpd of exports for more than three months.

The possibility of a little recovery of Iranian oil sales in early 2021 and potentially a fuller return in 2022 comes at a tough time for the market.

A tentative increase in oil demand from some Asian countries is being overwhelmed by renewed lockdowns in Europe and possibly the United States, as coronavirus cases surge.

Voluntary production cuts in Canada and Norway are being phased out, while Libyan exports have bounced back unexpectedly fast after a deal to end the blockade of oil terminals.

Depending when it reappears, a resurgent Iran would be a tricky factor for Opec+. The producers’ organisation had planned to ease its deep cuts at the start of next year, though this may well be delayed until the second quarter because of the weakening demand outlook.

Although the current quota plan runs only to April 2022, a return to 2019 production can only be gradual thereafter, unless the world economy really bounces back or US output collapses.

As it did last time, Tehran would not accept being bound by any Opec+ limits until it had substantially regained its previous output levels. This will add to tensions within the deal. Countries that have cut deeply but are able to raise production significantly in the coming years would not want to concede market share to Iran.

They may well push for a comprehensive reworking of the baselines for cuts established in April. This would place them at loggerheads with states with stagnant or declining production outlooks. Riyadh’s opinion matters, but there is the risk of a collapse of the arrangement before demand and Opec output have recovered to pre-pandemic levels.

The American exclusion of supplies from Iran has been a big favour to the other Opec+ members over the past two and a half years. The politics in both countries remains complex and uncertain. But the oil exporters had better plan for yet another bump on the winding road of recovery.

Robin Mills is chief executive of Qamar Energy and author of The Myth of the Oil Crisis