EU plan to enable non-dollar Iran trade, oil sales unraveling

WASHINGTON, DC: (From left) Yahoo Finance’s Adam Shapiro speaks with Neil Bradley, Chief Policy officer for the USChamber of Commerce, during the Yahoo Finance All Markets Summit: America’s Financial Future at The Newseum in Washington D.C. on Tuesday.-AFP

LONDON: Global oil supply will outpace demand throughout 2019, as a relentless rise in output swamps growth in consumption that is at risk from a slowing economy, the International Energy Agency said yesterday.

In its monthly report the Paris-based IEA left its forecast for global demand growth for 2018 and 2019 unchanged from last month at 1.3 million barrels per day (bpd) and 1.4 million bpd, respectively, but cut its forecast for non-OECD demand growth, the engine of expansion in world oil consumption. For the first half of 2019, based on its outlook for non-OPEC production and global demand, and assuming flat OPEC production, the IEA said the implied stock build is 2 million bpd.

Output around the world has swelled since the middle of the year, while an escalating trade dispute between the United States and China threatens global economic growth. Yesterday, three sources familiar with the matter told Reuters that OPEC and its partners are discussing a proposal to cut oil output by up to 1.4 million bpd for 2019 to avert an oversupply that would weaken prices.

Since early October, the oil price has fallen by a quarter to below $70 a barrel, its lowest in eight months, which may protect demand to an extent, the IEA said. “While slower economic growth in some countries reduces the outlook for oil demand, a significant downward revision to our price assumption is supportive,” it added.

The agency raised its forecast for oil output growth from countries outside the Organization of the Petroleum Exporting Countries to 2.4 million bpd this year and 1.9 million bpd next year, versus its previous estimate of 2.2 million bpd and 1.8 million bpd, respectively.

The United States will lead output growth. The IEA estimates total US oil supply will rise by 2.1 million bpd this year and another 1.3 million bpd in 2019, from a current record of more than 11 million bpd.
OPEC crude output rose by 200,000 bpd in October to 32.99 million bpd, up 240,000 bpd on a year ago, as losses of 400,000 bpd from Iran and 600,000 bpd from Venezuela were easily offset by increases from others, such as Saudi Arabia or the United Arab Emirates.

“Next year, there is expected to be even less need for OPEC oil due to relentless growth in non-OPEC supply,” the IEA said, adding that it had cut its forecast for demand for OPEC crude by 300,000 bpd to 31.3 million bpd in 2019. Inventories of oil in OECD countries rose by 12.1 million barrels in September to 2.875 billion barrels, the IEA said, adding that for the third quarter as a whole, stocks rose 58.1 million barrels, or at a rate of 630,000 bpd, the biggest increase since 2015.

Non-dollar oil trade?
A special European Union initiative to protect trade with Iran against newly reimposed US sanctions faces possible collapse with no EU country willing to host the operation for fear of provoking US punishment.

EU diplomats said the main European powers – Germany, France and Britain – would raise pressure on tiny Luxembourg to host the so-called Special Purpose Vehicle (SPV) after Austria refused to manage the plan and left it on the brink of collapse.
The stakes are high, for Iran has warned it could scrap a 2015 accord on curbing its nuclear program reached with world powers, including the big EU trio, if the bloc fails to preserve the deal’s economic benefits against US pressure.

The SPV is a kind of clearing house that could be used to help match Iranian oil and gas exports against purchases of EU goods in an effective barter arrangement circumventing US sanctions, based on global use of the dollar for oil sales.

The goal was to have the SPV legally in place by this month though not operational until next year, but no country has offered to host it, six diplomats told Reuters. The SPV is seen as the lynchpin of European efforts to salvage the nuclear accord, from which US President Donald Trump – who took office after the pact was clinched – withdrew in May, calling it flawed in Iran’s favor.

Austria has declined a request to play host for the SPV. Belgium and Luxembourg are two other possibilities, but both have expressed strong reservations, diplomats said, although they have not commented publicly. Their reluctance arises from fears that SPV reliance on local banks to smooth trade with Iran may incur US penalties, severing the lenders’ access to US markets, diplomats said.

“Austria has indeed refused. It’s not dead, but it’s not going in the right direction. We are going to try again with Luxembourg, but we’re under no illusions,” a European diplomat said yesterday.

Luxembourg is seen as a good candidate to manage the Iran SPV given its experience setting up a similar mechanism during the 2009-12 euro zone financial crisis.
Under the 2015 deal, Iran restricted its disputed nuclear program, widely seen in the West as a disguised effort to develop the means to make atomic bombs, in exchange for an end to international sanctions against it.

A European failure to salvage the economic spin-offs from the deal could strengthen anti-Western hardliners in Iran and spur more aggressive Iranian moves around the Middle East, where the Islamic Republic is involved in protracted proxy wars with its main regional rival Saudi Arabia.

Austrian Foreign Ministry spokesman Peter Guschelbauer confirmed Vienna would not host the entity after studying the impact with ministries and the central bank. “At the government level the decision was reached that there are simply still too many open questions and imponderables with this SPV,” Guschelbauer said.

EU foreign policy chief Federica Mogherini asked several states to consider being the headquarters, but diplomats said that as the SPV would need to work with local banks, they could become vulnerable to US punishment for sidestepping sanctions.
“No one has come forward at this stage. If we don’t have a host country, we have a very big problem. So much is riding on this that some way will need for someone to host this. There is a lot of nervousness about what hosting an SPV means,” another diplomat told Reuters.