Locked in a conflict with Iran that will only erupt when the economic pain becomes unbearable, President Donald Trump may have to maintain his military embargo against Iran for weeks – forcing dire economic consequences for the world.
Trump said on Wednesday he would maintain US sanctions against Iran until it agrees to a nuclear deal. Tehran, on the other hand, refuses to reopen the Strait of Hormuz until the US withdraws its Navy.
It is not clear which side will move first.
Trump said on Sunday that Iran’s oil infrastructure was days away from exploding because crude was shut down due to the blockade.
“There’s something going on where it just explodes,” Trump told Fox News. “They say they only have three days left for that to happen. If it explodes, you can’t rebuild it the way it was.”
But Iran still has weeks left in its tanks to store the oil it can export, experts say. This should give Tehran time to dismantle oil fields in an orderly manner that avoids permanent damage, they said.
The oil supply shock, on the other hand, is getting worse every day as Iran keeps the strain off, putting pressure on the US as the damage to the global economy grows.
“The question for me is who has the longest runway – Trump or Iran,” said Fernando Ferreira, head of Rapidan Energy’s national emergency service.
Iranian tankers are blocked
Tehran will feel the heat from the US blockade. There has never been a confirmed passage of an Iranian ship through the US embargo, according to ship tracking company Kpler.
Ships linked to Iran have crossed the strait but not past the blockade, from the Gulf of Oman to the Arabian Sea, according to Kpler.
As Iranian tankers were hunted by the US Navy, oil and condensate loading at its ports dropped from 2.1 million barrels per day (bpd) before the blockade to 567,000 bpd afterwards, Kpler found.
Iran will have to start filling its storage tanks because oil cannot be exported. Ultimately, Tehran will have to cut oil production as storage tanks near capacity.
Storage capacity
This is when Tehran will begin to feel the pressure but it may take a long time to force a reaction, according to Rapidan Energy.
“They were prepared to be blocked,” Ferreira said. “They have thought it through. They have seen what happened in Venezuela.”
“They are willing to continue for months,” said the analyst.
Iran has at least 26 days before its storage tanks are full and production cuts are inevitable, Ferreira said. The estimate assumes 26 million barrels of onshore storage and 21 million barrels of floating storage in 18 empty tanks, allowed in the region, he said.
But it’s a general approximation, warns Ferreira. Iran’s storage capacity suggests it has room for another 39 million barrels, giving it another 22 days beyond the 26, the analyst said.
There are also 31 ships connected to Iran that will return to the Middle East until the end of May to provide another 50 million barrels of storage, Ferreira said. That would allow Iran to hold out for 76 days, or more than two months, he said.
These estimates assume that Iran is regularly replenishing its storage at a rate of 1.8 million bpd, Ferreira said. In fact, Tehran is likely to start reducing production, which will stretch storage, he said. They also think that Iranian oil exports will not be affected by the blockade at all, the analyst said.
“Blocking can be very effective,” Ferreira said. “It’s about the timeline for it to put Iran under a lot of pain.”
It will take weeks or months to put Tehran under that kind of pressure, he said. “That runway may be longer than Trump envisioned for the results,” the analyst said.
Production is closed
Oil fields can be permanently damaged if they are shut down suddenly, systematically and uncontrollably, said Antoine Halff, an expert at the Center on Global Energy Policy at Columbia University.
But Iran’s last power buys time to shut down oil fields in an orderly manner, said Halff, who served as a senior oil analyst at the International Energy Agency. There is no reason Iran’s infrastructure will explode despite Trump’s comments over the weekend, he said.
“If you do everything in a systematic way, you minimize damage in the field. You may not have damage in the field,” said Halff, who is also an economist at the US Energy Information Administration.
“Of course it is a short-term challenge because they have run out of cash, but in terms of the operation of the stadium it is not a big challenge,” he said.
Iran could simply reduce production to the minimum level needed for domestic consumption that would render the entire storage question irrelevant, said Homayoun Falakshahi, head of crude oil analysis at Kpler.
The big question is when Iran runs out of revenue, Falakshahi said.
Iran has 120 million barrels of oil loaded in tanks east of the US embargo that can be delivered to customers including China, an analyst said. That is equivalent to two months of Tehran’s income, he said, although it faces challenges in selling oil and getting cash.
“If the blockade continues for another two months, Iran’s oil revenue may drop to zero,” Falakshahi said.
“The administration’s gamble is that this forces the Iranians to return to the negotiating table with a willingness to offer more concessions,” he said.
