Oil prices little moved as US sanctions on Iran come into force

Oil prices flatted out on Monday as US economic sanctions against Iran were reinstated but with eight countries given exemptions.

The sanctions were removed in 2015 when the joined a number of other world powers in signing a deal with Iran in exchange for the oil-rich country to scrap their nuclear weapons development program.

In May, President Trump unilaterally withdrew the US from the deal, threatening to reinstate the sanctions on Iran and impose extra tariffs on the countries trading with the country.

Finally, the US administration announced that countries including China, Italy, India, Japan, South Korea and Turkey are exempt from sanctions, which energy sector experts said will largely soften the impact of the sanctions. Last month also saw a record output from the world’s top producers.

The sanctions will hit the core of the country’s economy: Iranian oil exports, shipping and banks, with Trump stating on Friday that “our objective is to force the regime into a clear choice: either abandon its destructive behaviour or continue down the path towards economic disaster”.

Neil Wilson, analyst at Markets.com said: “Iran sanctions have come into force but it looks like oil prices have already factored in the impact on the market. Estimates about how much oil will be lost as a result of the measures have varied widely. Brent rallied as markets factored in a risk premium for this unknown, but as the sanctions take effect markets have become more sanguine; a case of buying the rumour, selling the fact perhaps.”

Having topped four-year highs above $82 per barrel a month ago, the price of Brent crude fell every day last week and on Monday was at $72.8 per barrel, not far from the lows seen in August.

The sanctions have generated anger in Tehran with thousands of citizens chanting “Death to America” on Sunday.

President Hassan Rouhani vowed to sell oil and break the sanctions and the military said it would hold air defence drills on Monday to prove the country’s capabilities.

Iran’s supreme leader Ayatollah Ali Khamenei has also denounced the measures as a disgrace to the U.S. prestige and he is confident that these measures have already harmed the U.S. relations to other countries.

Traders are on high alert and watching the oil market very closely, said market analyst Naeem Aslam at Think Markets.

"Under the re-imposed sanctions, the mission is to bring the oil export near to zero. Currently, the country is producing nearly 3.4m barrels per day. October’s production is down only by 10,000 barrels per day. The spare capacity for the country stands at 4.0m barrels per day."

He said the oil market was stable on Monday as traders are not overreacting. "They think that the increase in the oil production by other oil members and most importantly the waiver for some nations would continue to support the Iranian oil supply. On top of this, we see the demand curve shifting adversely and this has eaten up a lot of market’s strength.

"Back in October, the oil price surged towards its four-year high, but ever since, the global equity market raised concerns about the fuel demand. Looking at the prices now, one could easily see that the price is near the bear territory. It has dropped nearly 16.04% from its peak."