Oil prices hit a near six month high as the U.S. government moved to halt all Iranian oil exports, eliminating a key revenue source for the Islamic Republic.
West Texas Intermediate futures, the U.S. oil benchmark, rose 2.7% to $65.70 a barrel—their highest close since late October. Brent crude, the global oil benchmark, advanced 2.9% to $74.04 a barrel.
The price for a barrel of crude jumped by about $2 on Monday after the White House said it was ending waivers that for the past six months allowed eight countries including China, Japan and India to keep importing Iranian oil. The U.S. applied sanctions against the country last year, after the Trump administration ended a 2015 nuclear agreement.
In eliminating those waivers, the administration is aiming to bring Iranian oil exports of more than one million barrels a day down to zero. To make up for a lack of those Iranian barrels in global oil markets, the U.S., Saudi Arabia and the United Arab Emirates would boost output to keep global inventories adequately supplied, according to the White House.
The move to choke off all Iranian oil exports comes even as the Organization of the Petroleum Exporting Countries continues to comply with a deal reached in December to reduce output, which has helped send U.S. crude prices 45% higher this year.
“Today's announcement that the U.S. will not issue waivers for Iranian oil purchases moves oil markets into much tighter territory for the remainder of the year,” said Shin Kim, head of supply and production analytics at S&P Global Platts. “No U.S. Iran waivers nearly exhausts oil market's spare capacity in a time when risks to oil supply are high.”
Chris Kettenmann, chief energy strategist at Macro Risk Advisors, said the move will also push OPEC and its allies to lift production, eventually weighing on oil prices. “It gives Saudi and Russia an out on production cuts that were starting to hurt,” Mr. Kettenmann said.
A key question will be whether Iran's biggest customers, China and India, adhere to the Trump administration's demands. On Monday, China said it opposes U.S. unilateral sanctions. “China-Iran cooperation is open, transparent and in accordance with law, it should be respected, “ said Geng Shuang, a spokesman for China's Foreign Ministry.
Whatever the case, analysts said Iran's biggest current customers will expect the U.S. to give them some time to find other countries to buy oil from.
“They'll want a grace period because there's oil on the water right now that won't discharge until after the May 2 sanctions deadline.,” said Matt Reed, vice president of Washington- based consulting firm Foreign Reports, which focuses on energy and the Middle East.
Mr. Reed added: “Common sense dictates that there has to be a little wiggle room here, if only because the oil business moves slower than Washington.”
Analysts said the end of Iran waivers are likely to send gasoline prices higher. The national average for a gallon of regular gasoline stands at $2.84 a gallon, up 22 cents a gallon from a month ago. That makes a $3-a-gallon U.S. average, which hasn't been seen since 2014, a possibility.
The end of Iran waivers “could directly cause another round of gas price increases just as the national average reaches its highest level in months and points to a more painful summer at the pump,” said Patrick DeHaan, head of petroleum analysis at price tracking firm Gas Buddy. “With such a policy move, if OPEC fails to increase output to offset the likely drop from an end to Iran waivers, expect oil prices to continue to surge.”
U.S. oil prices have rebounded to levels last reached in late October
BY DANMOLINSKI AND AMRITH RAMKUMAR