The Trump administration is leaving itself wiggle room to continue allowing Iran to export oil, potentially setting up another catalyst for lower crude prices later this year.
The administration's special representative for Iran, Brian Hook, last weekend refused to say with certainty whether the White House will enforce sanctions more strictly on the Islamic Republic's oil exports. Instead, he left the door open to extending exemptions that have allowed some of Iran's biggest customers to continue importing its crude.
The administration's decision in November to grant sanctions waivers to eight countries, including China and India, surprised the market and contributed to a three-month collapse in crude oil prices.
President Donald Trump withdrew from a nuclear accord with Iran in May and restored sanctions on the country's energy industry in November. The administration wants Iran to stop testing ballistic missiles, end its support for militant groups and accept tougher limits on its nuclear program.
To be sure, Hook is maintaining the administration's message of "maximum pressure" on Iran and reiterating its goal of driving Iran's oil exports down to zero.
"We are not looking to grant any waivers or exceptions to the import of Iranian crude," Hook said during a panel at the Atlantic Council's 2019 Global Energy Forum in Abu Dhabi last weekend.
However, pressed by CNBC's Hadley Gamble on whether the administration would extend the waivers, Hook said he could not answer that question yet.
"All I can say is that we believe that ... when we have a better-supplied oil market, then that puts us in a much better climate to accelerate the path to zero," he said.
Hook's remarks suggest that the administration's decision will in part depend on the cost of crude when the six-month waivers expire around the start of May.
"I think that this administration made clear what some of us have said for some time, namely, that there is a relationship between the oil price level and the implementation of sanctions," said Michael Cohen, head of energy markets research at Barclays.
Cohen has previously written that Brent crude prices below $60 a barrel will embolden the Trump administration to apply sanctions more strictly, putting pressure on buyers to cut off imports from Iran. On the other hand, a spike back above $80 likely would force the administration to allow significant volumes of Iranian crude to hit the market.
Hook on Saturday reiterated what Trump has said: The administration agreed to the waivers to prevent an oil shortage that would cause prices to spike. In fact, the State Department's repeated vows to cut Iran's exports to zero played a major role in driving up oil prices throughout much of last year.
Oil fell from four-year highs at the start of October as crude futures got swept up in a broad market sell-off. The rout deepened after Trump issued the waivers, surprising the market and allies like Saudi Arabia, which had hiked production sharply in anticipation of strict sanctions.
Saudi Arabia and other OPEC members have said the oil market is now oversupplied largely because Washington kept its allies in the dark about the waivers.
Asked again on the sidelines of the Atlantic Council forum what OPEC should expect when the waivers expire this spring, Hook told CNBC he cannot comment on agreements with foreign countries.
"We're not in a position to telegraph or relay what we're going to be doing because each of these is confidential," he said.
However, some believe the link between oil prices and sanctions waivers is something of a smokescreen.
The real reason the Trump administration granted the waivers is because it was unable to work out a deal with some of Iran's biggest customers to stop buying oil from the Islamic Republic, says Amos Hochstein, the former international energy envoy who ran Iran sanctions under former President Barack Obama.
That raised the prospect of the U.S. being forced to sanction Chinese or Indian companies.
"There will 100 percent be exemptions in May," Hochstein said. "The reason for that is if you don't give an exemption and someone is importing, then you have to sanction them, and you probably don't want to sanction them."
Hook stressed that the eight countries received waivers because they had significantly reduced their purchases of Iranian crude. But these so-called significant reduction exemptions, or SREs, actually incentivize countries to continue purchasing Iranian oil, says Hochstein.
The waivers are designed to allow countries to continue buying Iranian crude so long as they demonstrate they are reducing their purchases. If a country cuts its imports to zero, then it cannot import Iranian crude again until the sanctions are lifted, explained Hochstein, now senior vice president for marketing at liquefied natural gas firm Tellurian.
Hochstein said the Trump administration continues to push inaccurate comparisons to Obama-era sanctions on Iran, which were designed to pressure Tehran to accept limits on its nuclear program.
"The Trump administration has a strange need to always compare their actions with the Obama sanctions, but in reality their intent was very different," he said. "We were intending to force Iran to the negotiating table, while the Trump administration wants to go to zero as an open-ended punishment."
Hook on Saturday said the Obama administration gave out 20 waivers, while the Trump administration only issued eight. However, many of the countries that received waivers under Obama — including European Union member nations — actually cut their purchases to zero immediately.
"The real issue is not how many exemptions you give, but how many countries continue to import," Hochstein said.
A State Department spokesperson on Wednesday said the oil market was fragile when Trump pulled out of the Iran nuclear deal, and the waivers prevented a price spike. The department restated Hook's comparison to the number of waivers granted under Obama.
"We granted waivers to eight — and two of those countries are already at zero," the State Department said. "We are also much more determined to drive up the costs of Iran's malign behavior; the Obama administration lowered the costs with the Iran deal."
China, India, Turkey and South Korea have taken Iranian crude since the sanctions snapped back into place on Nov. 5, according to tanker-tracking firm ClipperData.
China accounts for the lion's share, taking 576,000 barrels per day in December, ClipperData says. South Korea resumed its purchases this month, recently discharging 300,000 barrels, its first cargo since July.
Japan intends to resume imports of Iranian oil as early as this month, Nikkei reported on Tuesday.
Still, Iran's exports have plunged below 1 million bpd from about 2.5 million bpd before looming sanctions began to bite last year, according to Reuters.
— This story has been updated to include a State Department comment.