Oil markets do not expect a strong impact caused by sanctions against Iran

Joe Biden’s bill pushing for stronger sanctions on Iranian crude is on track to become law as early as this week. But don’t expect the president to fully use his new powers anytime soon.

The measure was passed by the US House of Representatives over the weekend in response to Iran’s attack on Israel earlier this month. On paper at least, they promise to expand restrictions on Iranian crude exports to include foreign ports, ships and refineries that knowingly participate in the trade.

But oil market analysts say Biden will be reluctant to take steps that could raise the price of crude oil or the gasoline that American drivers buy at gas stations. According to political experts, the president is likely to use the right of derogation included in the sanctions and avoid their strict application.

The situation somewhat mirrors the one the Biden administration faced with regard to Russia and its invasion of Ukraine. Although the White House has imposed sanctions on Russia, it has sought to limit the country’s revenue while allowing oil exports to continue to flow to avoid shrinking global supplies and fueling inflation, a vital domestic factor for the president in an election year. Last week, the administration also allowed Venezuelan oil to continue flowing even as it renewed sanctions targeting President Nicolas Maduro.

“Oil traders are indifferent because they know that Biden will certainly sign any waivers to keep Iranian oil in the market, just as he keeps Russian barrels in the market,” said Jim Lussier, managing director at Capital Alpha Partners, based in Washington research group.

The White House National Security Council declined to comment on the sanctions. The administration is still analyzing the bill, but no impact on oil markets is expected before the fall, a person familiar with the matter said.

The oil market is currently particularly sensitive to the possibility of further restrictions. Brent crude oil prices topped $92 a barrel earlier in April, their highest in nearly six months, amid strong global demand and continued output cuts by OPEC and its allies.

According to ClearView Energy Partners, a Washington-based consulting firm, if the new sanctions are introduced and implemented, they could increase global prices by as much as $8.40.

That would be bad news for Biden, who has already tapped into the nation’s strategic oil reserve after domestic fuel prices spike in 2022. While U.S. gasoline prices are still far from their then-highs, they have risen this year year, and the peak driving season is still to come.

The latest sanctions are part of a foreign aid package the Senate must pass later this week. They include provisions to remove China’s ability to use sanctioned Iranian oil, effectively refining already existing powers. According to a report by the House Financial Services Committee, about 80 percent of Iran’s exports of about 1.5 million barrels a day go to China to be processed by small independent refiners.

The bill would expand the definition of a “significant financial transaction” under existing U.S. sanctions to include transactions of any size between Chinese and Iranian financial institutions to purchase Iranian oil, according to a Bloomberg Government summary of the law.

There is a “new element of risk” that the measure could target ports, vessels and refineries involved in the shipping, processing and other transactions of Iranian crude, said Fernando Ferreira, director of geopolitical risk services for Rapidan Energy Group . However, they are also subject to a potential exemption, allowing Biden to make exceptions in cases where national security is deemed a concern.

“They’re unlikely to implement this thing in full force,” Ferreira said of the administration. “Perhaps we will see a small reduction in imports as a precaution.”

However, it may become more difficult for Biden to defend sanctions relief if Iran and its proxies begin more direct aggression against Israel.

“The use of sanctions relief if Iran continues its regional aggression could be as damaging politically as high gasoline prices,” said Kevin Book, managing director of ClearView Energy Partners, a Washington-based consulting firm.