© Raheb Homavandi / ReutersOil production platform at the Soroush oil fields in the Persian Gulf, south ofTehran.
The US administration has been pushing its allies to follow US President Donald Trump's lead after he decided to pull out of the landmark nuclear agreement between Iran and six world powers. A senior State Department official told reporters on Tuesday he had been traveling to Europe and Asia to convince allies to isolate the "stream of Iranian funding."
Washington's allies, including those dependent on Iran's oil, should ultimately refuse the imports by November 4 or else face secondary US sanctions. It was stressed that there are no waivers planned.
This mean that the Trump administration will not allow countries to gradually phase out Iran's oil exports over the duration of many months like the Obama White House did.
"We have a lot of diplomatic muscle memory for urging, cajoling, negotiating with our partners to reduce their investments to zero," the unnamed State Department official said.
Their trip did not included Turkey, and the largest importers of Iran's oil - India and China - so far, but the countries are also to be urged to stop purchases by early November.
India and China traditionally used to get a waiver from sanctions and kept trading with Iran even before the 2015 agreement, so speculation is rife as to whether they will manage to find workarounds this time.
The State Department acknowledges that cutting off Iranian oil imports completely is a "challenge" that no country "wants to do voluntarily".
Among Iran's most significant customers are China, South Korea, India and Japan. The State Department said that, even if reluctantly, Tokyo understands "that the Secretary and the White House aren't kidding" about sanctions, the official said.
In Europe, where the biggest customers are France and Italy, the US is meeting resistance - especially among those countries that helped negotiate the Iran deal. The UK, France and Germany voiced opposition to Trump's withdrawal from the Joint Comprehensive Plan of Action (JCPOA) and the EU put measures in place aimed at protecting companies from secondary sanctions.
Oil prices spiked on the announcement, which already comes during concerns about shortages and crude prices hitting a three-and-a-half-year high.
Comment: More detail on the oil price hikes:
Oil prices spiked on the news, rising by more than 3 percent on Tuesday afternoon. WTI is back above $70 per barrel for the first time in over a month.
The effect of knocking 1 mb/d of supply offline by the end of the year is hard to overstate. The oil market is already in a deficit situation, with inventories continuing to decline. Venezuela is expected to continue to post production declines, likely losing several hundred thousand barrels per day of supply by the end of the year, at the very least. Surprise outages from Libya, Nigeria and, most recently, Canada came out of nowhere over the last few weeks. Together, all of the disruptions more than overwhelm the 600,000 bpd that OPEC+ is set to add back onto the market.
On Monday, US Secretary of Energy Rick Perry said that the increases from the OPEC+ meeting last week "may be a little short" of what is needed to keep the market balanced. Analysts are now speculating that he or other American officials will ask Russia to boost output in order to prevent oil prices from rising too much. Sec. Perry, after all, is set to meet his counterpart, Russian energy minister Alexander Novak, at a natural gas conference in Washington this week. "It's not a big leap to think he's going to ask Novak for more oil after today's commentary," John Kilduff of Again Capital told CNBC. Kilduff noted that such a request would be unusual, "but these are strange times."
Previously, the US asked Saudi Arabia to boost output to offset declines from Iran.
However, making up for a sudden loss of 1 mb/d, especially when other outages are multiplying, will be exceedingly difficult. In fact, Saudi Arabia and Russia may not be able to account for such sizable losses. That means that the market may have to balance via demand destruction, which is to say, oil prices could be heading much higher.
The withdrawal from the nuclear deal left the US isolated, as its close allies, including France, UK, and Germany, have been working to prevent the agreement from crumbling. Meanwhile Iran vowed to reopen its second uranium enrichment facility if the nuclear deal collapse
Comment: The US is pushing its 'allies' into a corner and may eventually find itself irrelevant as they find partners who are willing to conduct business on mutually beneficial terms without threats and intimidation: