Balancing Act---Sanctions, Venezuela, Trade War and Demand

Hello All!

As the news, that U.S. administration is not going to extend the waivers, takes hold and oil markets react (as expected) there is a very important question that needs a separate thread; I expect lots of discussion and points of view here as this is totally an open ended question subject to countless "ifs" and "buts".

A question that I want to ask and am working on myself as well is that given the Iranian sanctions, Venezuelan crisis, on-going trade war, concerns regarding global economic growth, and that Summer Driving Season approaches nigh---what do you think will be Trump's reaction to a spike in prices (which I am expecting)? Will he tweet---well he did few weeks ago...didn't work out as expected---? Gasoline prices are on rise but KSA is getting greedy for $80 oil ( @Tom Kirkman---you are right in that) so what do you think will be Trump's tool to bring down the prices, which ironically, he himself is causing to rise?

@Marina Schwarz, @William Edwards, @Keven Tan, @ceo_energemsier

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I can't second guess Trump.

But this should complicate global oil a bit more.  Not quite sure what to make of this yet:

But on the brighter side:

 

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Trump will tweet and moan, but it is a creature of his own creation and his pleading for KSA to open the taps will again fall on deaf ears as it is still fresh on KSA and Opec's mind when he vowed Iran sanctions to 0 oil exports then gave waivers and thus the glut slamming prices in 4th quarter last year causing the new round of OPEC cuts to stabilize prices.  Then again, KSA and OPEC could adjust if the market tightens to much before June meeting.  I think it will probably be a wait and see where things go between cutting exports of Iran to 0, market stability, supply tightening and where production stands in other areas such as Iraq and Venezuela before meeting in June.

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1 hour ago, cbrasher1 said:

Trump will tweet and moan, but it is a creature of his own creation and his pleading for KSA to open the taps will again fall on deaf ears as it is still fresh on KSA and Opec's mind when he vowed Iran sanctions to 0 oil exports then gave waivers and thus the glut slamming prices in 4th quarter last year causing the new round of OPEC cuts to stabilize prices.  Then again, KSA and OPEC could adjust if the market tightens to much before June meeting.  I think it will probably be a wait and see where things go between cutting exports of Iran to 0, market stability, supply tightening and where production stands in other areas such as Iraq and Venezuela before meeting in June.

Yes, indeed, we will have to wait and see!

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Weren’t some “experts” already predicting that OPEC + Russia might not continue with the self imposed production cuts they have been sticking to.  Sounds like a win win.  Real sanctions on a real problem via no more waivers for Iranian oil.  OPEC+ increases production to fill the gap.  

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54 minutes ago, TXPower said:

Weren’t some “experts” already predicting that OPEC + Russia might not continue with the self imposed production cuts they have been sticking to.  Sounds like a win win.  Real sanctions on a real problem via no more waivers for Iranian oil.  OPEC+ increases production to fill the gap.  

How do you see that as a win-win?

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6 hours ago, cbrasher1 said:

Trump will tweet and moan, but it is a creature of his own creation and his pleading for KSA to open the taps will again fall on deaf ears as it is still fresh on KSA and Opec's mind when he vowed Iran sanctions to 0 oil exports then gave waivers and thus the glut slamming prices in 4th quarter last year causing the new round of OPEC cuts to stabilize prices.  Then again, KSA and OPEC could adjust if the market tightens to much before June meeting.  I think it will probably be a wait and see where things go between cutting exports of Iran to 0, market stability, supply tightening and where production stands in other areas such as Iraq and Venezuela before meeting in June.

My own personal opinion is Trump is a master of misdirection.  USA has almost full control of the oil market save Russia and some of OPEC.  Trump says he wants lower fuel prices so his constituents will be happy, and he has been able to keep prices low until now.  Part of Trumps constituents are also made up of Big oil and he wants to see those people happy as well.  Trump knows the importance of oil to the American economy.  So, Trump cancels future waivers from Iran which applies pressure to big consumers like India and China, and causes prices to go up (less supply/vehicles, growing demand).  India and China can keep getting their oil from Iran, but it's going to look bad, there will be penalties if caught, and India and China will have to go to shady, unsecure vehicles to get their black market Iranian oil (not safe investment). 

Trump is so far ahead of everyone in his understanding of the power of the oil/energy market that he has gone big on endorsing pipeline makers, steel producers, manufacturing in general.  He received a big investment in our southern border which should help finance related work and drive oil/energy demand nationally.  He has kept a door open to KSA when the media all but wanted to kill that relationship (over bs Islamic brotherhood Kashoggi), and has remained committed in lending a hand in defeating Iranian backed Houthies in Yemen.  

The failures of the last administration in Libya has all but shutdown Libyan production, or at the very least made Libyan oil production anything but "certain", and distribution uncertain, providing USA with further control of output levels globally.  As well as the failure of the last administration foreign policies in Venezuela have revealed what would happen to a nations oil production output once you allow socialism to take over, its dead and the country is dying. Good luck getting return from either Venezuela or Libya.  Russia and China will dump plenty of assets in Venezuela all for naught; USA (we) will let China and Russia dump assets, because it will all be wasted; Russia and China have no way to assert authority in Venezuela (you would need a blue water navy in order to assert authority in Venezuela, something neither Russia or China currently maintain).  Trump was wise, to begin what will be a very strong relationship with Brazil.   

America will be, for a long time, #1 safest investment for all of your oil/energy needs.  Good luck to those nations who procure from anywhere else, you (they) are going to need it!   

At the end of the day, you are a nation, who would you rather buy oil from?  where is your safest oil/energy investment?    USA or Russia?  USA or Libya?  USA or Venezuela?  USA or Iran? 

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3 hours ago, Osama said:

How do you see that as a win-win?

No more waivers means it’s harder for Iran to sell their oil, which chokes them financially and hinders their ability to be, well, Iran.

U.S. Shale or OPEC+ can increase their market share by pumping more and selling more with less Iranian oil on the market. Someone is going to fill the gap.

 

 

 

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9 hours ago, TXPower said:

Weren’t some “experts” already predicting that OPEC + Russia might not continue with the self imposed production cuts they have been sticking to.  Sounds like a win win.  Real sanctions on a real problem via no more waivers for Iranian oil.  OPEC+ increases production to fill the gap.  

TXPower,

The problem is that spare capacity will fall to zero, any problem in Libya, Nigeria, Venezuela or elsewhere in the oil producing World will lead to a shortage in oil supply and a spike in oil prices.  Also why wouldn't OPEC slowly increase output and let oil prices rise to $80/b, if US tight oil rises too much, they can punish those producers by raising output so that prices fall,  US tight oil producers would be wise to slowly increase production and not piss off OPEC/Russia.

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Think how great it would be for individual drivers and the transportation industry if a bigger proportion of large vehicles would convert to natural gas fuel. Not only would they save money on their fuel expense but would also lessen demand for petroleum products!

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2 hours ago, D Coyne said:

TXPower,

The problem is that spare capacity will fall to zero, any problem in Libya, Nigeria, Venezuela or elsewhere in the oil producing World will lead to a shortage in oil supply and a spike in oil prices.  Also why wouldn't OPEC slowly increase output and let oil prices rise to $80/b, if US tight oil rises too much, they can punish those producers by raising output so that prices fall,  US tight oil producers would be wise to slowly increase production and not piss off OPEC/Russia.

There are already major problems in all the places you named.

We’re really talking about Saudi when we say OPEC.  We have some other tools to use to discourage the path you laid out that they might take.

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2 hours ago, D Coyne said:

TXPower,

The problem is that spare capacity will fall to zero, any problem in Libya, Nigeria, Venezuela or elsewhere in the oil producing World will lead to a shortage in oil supply and a spike in oil prices.  Also why wouldn't OPEC slowly increase output and let oil prices rise to $80/b, if US tight oil rises too much, they can punish those producers by raising output so that prices fall,  US tight oil producers would be wise to slowly increase production and not piss off OPEC/Russia.

Tex, "spare capacity" [by which I assume you mean spare production capacity, not the storage stuff in those big tank farms] will disappear totally once 1/1/2020 rolls around.  On that date, assuming there is no extension of deadline and no widespread cheating, the world's shipping fleet will be switching over to low-sulfur diesel.  And the reason is that very few ships  have installed oil purification systems on-board, very  very few have converted to dual-fuel with natural gas as a co-fuel,  and there certainly is nowhere near enough diesel, or diesel refining capacity, out there to instantly supply the world's fleet.  

So, you are headed for a big mess in another eight months.  That seems like a lot of time, but it will be by in a flash. Will diesel get bid up through the roof?  Possibly.  Perhaps, probably.  What about the truckers, what will they do?   Set up barricades and burn old tires, most likely. But you are looking at road diesel at $5/gallon in the USA, so extrapolate that out for Europe and others.  Can Venezuela get back up and running to crank out diesel?  Probably not.  How about Russia?  Well, their diesel is low-grade stuff, and Western truck diesels really need at least 42 cetane to run.  So you would have to dilute Russian diesel with kerosine or jetfuel,which strikes me as not conducive to long-term planning.  

How about heating oil?  Lots of heating oil is consumed in the USA, Canada, and Germany.  How do you switch that over to gas or propane in eight months?  The crunch will come in the dark part of winter, not an encouraging prospect.  So I predict a very large increase in wood for heat.  That is good for the wood-furnace builders in the Czech Republic, not so good for the oil-tank builders. Unless people start doubling or tripling their in-house oil-tank capacity and fill up before December, to beat the price rush. 

Bottom line:  wood and coal are going to make a comeback.  The crunch on diesel is going to be a real killer. 

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I notice that many of the comments assume that the US shale play is robust and not a 'house of cards'. How about some analysis with the scenario that US shale is peaking due to debt load, sweet spots already drilled, ongoing sibling well issue, and so forth.

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42 minutes ago, Douglas Buckland said:

I notice that many of the comments assume that the US shale play is robust and not a 'house of cards'. How about some analysis with the scenario that US shale is peaking due to debt load, sweet spots already drilled, ongoing sibling well issue, and so forth.

^ this.  Very much this. 

All of the points are valid.  Very well said, Douglas.

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5 hours ago, Jan van Eck said:

Tex, "spare capacity" [by which I assume you mean spare production capacity, not the storage stuff in those big tank farms] will disappear totally once 1/1/2020 rolls around.  On that date, assuming there is no extension of deadline and no widespread cheating, the world's shipping fleet will be switching over to low-sulfur diesel.  And the reason is that very few ships  have installed oil purification systems on-board, very  very few have converted to dual-fuel with natural gas as a co-fuel,  and there certainly is nowhere near enough diesel, or diesel refining capacity, out there to instantly supply the world's fleet. 

Very interesting point!!

 

Coming from a different point of view---this also hints towards a more bullish future?

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If there is not enough diesel refining capacity, why will the 'storage' disappear? If you can't refine into product it will simply remain in the storage tanks and then, once again, we will be over supplied and the price of crude will 'tank' (pun intended).

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3 hours ago, Douglas Buckland said:

If there is not enough diesel refining capacity, why will the 'storage' disappear? If you can't refine into product it will simply remain in the storage tanks and then, once again, we will be over supplied and the price of crude will 'tank' (pun intended).

Not quite.  The refiners will be running flat-out to meet the increased marine demand, and ships will be lined up out in the harbour waiting to load their new fuel, but unable to do so, due to not enough to go around.  The refined material never makes it into storage, as there is not enough to go around. 

What are the consequences? Nobody knows; you are entering into new territory.  Logically, it bids up the price of diesel. It also will likely end up shutting in the crude that is the most costly to produce - likely candidate for that is, unfortunately, Canada. It will also logically force the smaller shippers out of business, with the accompanying scrapping of their ships.  Fuel is today the largest cost of operating a ship, and the fuel bill is likely to at least double.  Will new-builds also include masts and sails?  Probably.  Will new-builds be built with dual-fuel engines and add LNG to their fuel mix?  Probably. 

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17 hours ago, Jan van Eck said:

Tex, "spare capacity" [by which I assume you mean spare production capacity, not the storage stuff in those big tank farms] will disappear totally once 1/1/2020 rolls around.  On that date, assuming there is no extension of deadline and no widespread cheating, the world's shipping fleet will be switching over to low-sulfur diesel.  And the reason is that very few ships  have installed oil purification systems on-board, very  very few have converted to dual-fuel with natural gas as a co-fuel,  and there certainly is nowhere near enough diesel, or diesel refining capacity, out there to instantly supply the world's fleet.  

So, you are headed for a big mess in another eight months.  That seems like a lot of time, but it will be by in a flash. Will diesel get bid up through the roof?  Possibly.  Perhaps, probably.  What about the truckers, what will they do?   Set up barricades and burn old tires, most likely. But you are looking at road diesel at $5/gallon in the USA, so extrapolate that out for Europe and others.  Can Venezuela get back up and running to crank out diesel?  Probably not.  How about Russia?  Well, their diesel is low-grade stuff, and Western truck diesels really need at least 42 cetane to run.  So you would have to dilute Russian diesel with kerosine or jetfuel,which strikes me as not conducive to long-term planning.  

How about heating oil?  Lots of heating oil is consumed in the USA, Canada, and Germany.  How do you switch that over to gas or propane in eight months?  The crunch will come in the dark part of winter, not an encouraging prospect.  So I predict a very large increase in wood for heat.  That is good for the wood-furnace builders in the Czech Republic, not so good for the oil-tank builders. Unless people start doubling or tripling their in-house oil-tank capacity and fill up before December, to beat the price rush. 

Bottom line:  wood and coal are going to make a comeback.  The crunch on diesel is going to be a real killer. 

The bulk of the IMO compliant fuel for vessels will be produced by refineries globally where the laws are enforced more stringently unless there are waivers. A similar situation arose back in the 2000s when a similar rule was put into place for lower sulphur and emissions. Vessels having on-board diesel upgrading techs is not very cost effective at this time. Refineries in the US, EU , Singapore, Japan and other major refining hubs will try to comply with the new rules by installing the processes and technologies that are available to get the compliance or will get exemptions for a certain time frame.

From all the demand for the low sulphur diesel and fuels, one thing is for sure, refineries that are not capable of processing low sulphur higher grade sweeter crudes will have to reconfigure their refineries to process the sweeter crudes and the demand for the lighter , sweeter crude will go up , meaning the US shale industry will be more in demand for the light sweet shale crude oils they produce and huge global demand for the US shale crude oils from the Permian, Marcellus, Utica, Eagle Ford , Bakken etc. High API, low sulphur crude oils, they may end up commanding a premium over Brent and TAPIS benchmarks including the US condensates being produces.

 

 

 

 

Here is the thing about onboard scrubbers!

__________________________________

"

WILL “SCRUBBERS” HELP THE SHIPPING INDUSTRY?

Shipowners can install kit called a “scrubber” that strips out sulphur emissions and allowing them to use the dirtier fuel oil. Some ships already have them. Global trading firm Trafigura has ordered scrubbers for its fleet of 32 ships.

But the equipment alone can cost $1 million to $6 million, according to manufacturer Wartsila, putting it out of reach of many operators.

By 2020, about 2,000 ships could have scrubbers, according to Wartsila, SEB Bank and industry analyst AlphaTanker.

Scrubbers are “No Silver Bullet” for Shipping Industry, Wartsila Says

But AlphaTankers’ Andrew Wilson called this a “drop in the ocean”, given there are about 90,000 vessels in the global fleet, of which about 60,000 ply international routes.

Based on the limited number of manufacturers and time constraints on facilities to install scrubbers, AlphaTanker estimates no more than 500 ships could be fitted each year. Wartsila puts the figure closer to 300.

So it would take more than 100 years to fit the global fleet.

________________________________________________________________

CAN REFINERS MEET NEW DEMAND?

The global refining industry needs to process an extra 2.5 million bpd of crude to make distillates for cleaner fuel, says Robert Herman, refining executive at Phillips 66.

Some refiners have invested in cutting sulphur in their output, but fitting hydrocracker or coker unit so that a refinery produces more distillates with lower sulphur content while reducing fuel oil output can cost about $1 billion, analysts say. Small refineries, unable to afford the upgrade, may find they are churning out fuel oil without finding buyers.

Rich Rewards Await Top Oil Refiners as Ships Make Low Sulphur Switch Fuel

A KBC consultancy survey showed 40 percent of Middle Eastern and European refineries are not prepared. European plants, which tend to be less complex than those in other regions, produce more fuel oil and may face the biggest challenge.

Morgan Stanley says refineries of Spain’s Repsol, Turkey’s Tupras, India’s Reliance and U.S. independent Valero are among the best prepared because they already produce high middle distillate and low high-sulphur fuel oil.

WHAT WILL HAPPEN TO THE CRUDE MARKET?

The simplest way for refineries to produce fuel with less sulphur is to buy and process crude that contains less sulphur, a shift that could change demand for different oil grades and lead to greater oil market volatility.

For example, processing Iraq’s Basra Heavy grade with high sulphur content produces as much as 50 percent fuel oil, while using light, sweet North Sea crude with less sulphur produces about 12 percent fuel oil.

“There will be a bidding war for sweet crude,” said Stephen George, chief economist with KBC Advanced Technologies.

This could hike the price of sweeter crudes, including several grades used to make dated Brent, the benchmark for three quarters of the world’s oil. Meanwhile, the cost of refining “sour” crudes with more sulphur, such as those from Venezuela, Mexico and Ecuador, “could be more than its value,” he said.

WHO WILL PAY THE PRICE?

Energy firms and shippers may face a squeeze on margins. But, ultimately, extra costs are likely to fall on consumers of everything from household appliances to gasoline that are shipped around the world. Roughly 90 percent of world trade is by sea.

Wood Mackenzie estimates that global shipping fuel costs are likely to rise by a quarter, or $24 billion, in 2020. Others estimate extra costs for container shipping alone will be $35 billion to $40 billion.

In addition, a surge in distillate demand by shippers could push up prices of other products, such as jet fuel and diesel.

“It’s going to make moving anything more expensive,” said AlphaTanker’s Wilson.

Example, Mexico already delayed their cleaner diesel requirement from a 2016 law.

https://www.reuters.com/article/us-mexico-diesel-regulation/mexico-to-delay-clean-diesel-rule-as-fuel-is-scarce-sources-documents-idUSKCN1P92KV

 

https://www.breakthroughfuel.com/blog/sulfur-2020-diesel-prices/

 

 

 

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9 hours ago, Jan van Eck said:

Not quite.  The refiners will be running flat-out to meet the increased marine demand, and ships will be lined up out in the harbour waiting to load their new fuel, but unable to do so, due to not enough to go around.  The refined material never makes it into storage, as there is not enough to go around. 

What are the consequences? Nobody knows; you are entering into new territory.  Logically, it bids up the price of diesel. It also will likely end up shutting in the crude that is the most costly to produce - likely candidate for that is, unfortunately, Canada. It will also logically force the smaller shippers out of business, with the accompanying scrapping of their ships.  Fuel is today the largest cost of operating a ship, and the fuel bill is likely to at least double.  Will new-builds also include masts and sails?  Probably.  Will new-builds be built with dual-fuel engines and add LNG to their fuel mix?  Probably. 

There is sufficient refining capacity around the world, they will just need to reconfigure the refining process and some of their equipment to get a product slate that yields more of the low sulphur products as well as changing their refinery feedstock blending requirements to yield more low sulphur distillates and not as much of the fuel oil or residuals. This also means that the demand for lighter , sweeter, low sulphur (US shale crude oils) will go up maybe 1,500,000-2,800,000bpd. It also means that a number of new technologies are being developed and will be developed to cope with the specification requirements. We are currently testing (with success) 3 separate processes/technologies to upgrade existing refinery product slate from fuel oils to diesel grades and make them compliant with low sulphur requirements.

There are dozens of other companies who are also doing similar R&D and testing. We are at the stage whereby we have tested our proprietary technologies on a scale of 35,000bpsd to 125,000bpsd in different locations around the world.

Dual fuel capable vessels will be efficient and over the long term cost effective. There are several companies that are using LNG as bunkering fuel.

The most efficient, cost effective way to successfully implement the new IMO requirements is within the refining system.itself trough the technologies of upgrading existing "standard" run diesel and other fuels and also upgrading heavier , higher sulphur crude oils into lighter , sweeter, lower sulphur crude oil.

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21 hours ago, TXPower said:

There are already major problems in all the places you named.

We’re really talking about Saudi when we say OPEC.  We have some other tools to use to discourage the path you laid out that they might take.

TXPower,

It is not clear that Saudi Arabia alone can fill the 1 Mb/d gap from reduced Iranian exports and Venezuela, Libya, and/or Nigeria could become worse.  In any case, we will see, perhaps OPEC will increase output to keep prices at $70/b and there will be no further demise of output in Venezuela and elsewhere, seems a very narrow path.

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4 minutes ago, D Coyne said:

TXPower,

It is not clear that Saudi Arabia alone can fill the 1 Mb/d gap from reduced Iranian exports and Venezuela, Libya, and/or Nigeria could become worse.  In any case, we will see, perhaps OPEC will increase output to keep prices at $70/b and there will be no further demise of output in Venezuela and elsewhere, seems a very narrow path.

Agreed.  We shall see.

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18 minutes ago, TXPower said:

Agreed.  We shall see.

Venezuela and Libya are out of the picture for an extended time period. They will not have any meaningful production coming forth any time soon. Venezuela  worse off than Libya in many aspects to be able to bring any production back to the world market in a market stabilizing manner.

Nigeria has its own set of issues, corruption and theft of oil by tapping into pipelines that end up exploding and leaking and polluting oil , mostly work of the Niger Delta insurgents/militants. I think there is still  force majeure on one of the trunk lines.

North Sea production is in decline (Brent issues and the commingled crude stream Brent Blend, Ekofisk, Forties Blend & Oseberg).

Saudi is the most viable 'swing producer' along with the US shale that can be ramped up with the huge inventory of DUC's.

1,000,000bpd should not be an issue to be replaced by a few producers including the US, and some members of OPEC.

 

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I would be surprised if Iran ends up shut-in.  First, the waterways to ship Iranian crude from Kharg Island are international.  Nobody is in a state of declared war against Iran, so it can and will use that waterway (strait of Hormuz) same as everybody else.  The so-called "embargo" is Donald Trump exercising his blowhard privileges.  Can he stop anyone from buying Iranian crude?  Of course not.  What he can do is block payment transfers for that oil through US banks.  OK, so there are lots of other banks.  He can shout about blocking payments made in US Dollars.  But hey, nobody is carrying around suitcases of hundred-dollar bills to pay for a tanker-load of oil.  It is all done by electronic funds transfers.  So a non-US bank sending cash to the Bank of Iran is hardly going to get socked.  

What Trump can do, in theory, is institute a "secondary boycott."  that is when Trump declares to say India:  "You buy their crude, and you cannot export your goods into the USA."  Now, the threat of that is sufficient to totally spook say the South Koreans, who cannot risk the interruption of their goods outflows to US markets.  How about India?  Would they really care?  Probably not. 

Once that Iranian oil is "landed" in say India, then it becomes sanitized.  I would expect trading houses to go re-sell that oil into the world markets, by simply transferring it to some other ship.  It now gets labelled as Nigerian oil, or whatever, some place where record keeping is a bit rough and nobody really knows the provenance of that oil.  If the Chinese or the Japanese buy it in good faith, hey who is to blame? 

there are lots of countries that will ignore the "sanctions."  And some will buy and re-ship.  How about Russia?  Will Putin do that just to stick it into the US eye?  Probably.  End result:  Iran is not getting tossed out of the oil sales game.  

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