Oil prices rallied by about 3 per cent on Monday to their highest since late 2018 as the United States was set to announce that all imports of Iranian oil must end or be subject to sanctions.

Brent crude futures rose as much as 3.3 per cent to $74.31 a barrel, the highest since Nov 1, before easing back to $73.82 by 0452 GMT, up 2.6 per cent from their last close.

US West Texas Intermediate (WTI) crude futures climbed by as much as 2.9 per cent to $65.87 per barrel, the most since Oct. 31, and were at $65.38 at 0452 GMT, up 2.6 per cent from their last close.

News that the United States is preparing to announce on Monday that current buyers of Iranian oil would no longer be given waivers to current sanctions was first reported on Sunday by Washington Post foreign policy and national security columnist Josh Rogin.

Secretary of State Mike Pompeo will announce “that, as of May 2, the State Department will no longer grant sanctions waivers to any country that is currently importing Iranian crude or condensate”, Rogin said, citing two State Department officials that he did not name. AP reported that sanction waivers for five countries — India, China, Japan, South Korea and Turkey — will not be renewed after they expire on May 2.

A person familiar with the situation told Reuters the report was accurate, although a State Department spokesman declined to comment.

It was not immediately clear if any of the five would be given additional time to wind down their purchases or if they would be subject to US sanctions on May 3 if they do not immediately halt imports of Iranian oil.

However, an unnamed Iranian oil ministry source was quoted by the semi-official Tasnim news agency as saying that even if Washington ends waivers granted to buyers of Iranian crude, the US will fail to cut Iranian oil exports to zero.

“Whether the waivers continue or not, Iran's oil exports will not be zero under any circumstances unless Iranian authorities decide to stop oil exports ... and this is not relevant now,” Tasnim quoted the unnamed “informed source” as saying.

In March, Iran was the fourth-largest producer among the Organisation of the Petroleum Exporting Countries (OPEC) at 2.75 million barrels per day (bpd) though exports have shrunk to about 1 million bpd since sanctions were reimposed in November.

The US put the sanctions back on Iranian oil exports after President Donald Trump unilaterally pulled out of a 2015 nuclear accord between Iran and six world powers.

Washington, however, granted Iran's eight main buyers of oil, mostly in Asia, waivers to the sanctions which allowed them limited purchases for six months.

Analysts criticised the end to the exemptions, which would hit Asian buyers the hardest.

“This is not a good policy for Trump,” said Takayuki Nogami, chief economist at Japan Oil, Gas and Metals National Corporation (JOGMEC), adding that “concerns over tightening global oil supply and lower excess production capacity are expected to bolster oil prices higher.”

He added that Brent prices are likely to rise toward $86.29 a barrel, the highest price it reached in 2018, while WTI may climb to $76.41.

Iran's biggest oil customers are China and India, who have both been lobbying for extensions to sanction waivers.

South Korea is a major buyer of Iranian condensate, an ultra-light form of crude oil on which its refining and petrochemical industry relies heavily.

Removing the sanctions exemptions would reduce oil supply from a market that is already tight because of US sanctions against Iran and fellow OPEC-member Venezuela.

Additionally, OPEC, along with other global oil producers, have already imposed supply cuts since the start of the year aimed at tightening global oil markets and propping up prices.

As a result, Brent prices have risen by more than a third this year, while WTI has climbed more than 40 per cent over the same period.

Jogmec's Nogami said OPEC's leading producers “Saudi (Arabia), the United Arab Emirates and Kuwait need to boost output to cover the shortfall".

Saudi Arabia is willing to compensate for any potential loss of crude supply if the US ends waivers granted to buyers of Iranian oil, but the kingdom will assess the impact on the market before raising its output, a source familiar with Saudi thinking told Reuters.

World reaction

Major exporters of Iranian crude oil have received the expected US announcement with alarm. Iraq's electricity ministry pointed out that the country has no alternative to Iranian gas and halting imports will cost 4,000 megawatts of power.

Meanwhile, India expressed hope that the US will allow its allies to continue to buy some Iranian oil instead of halting the purchases altogether from May, a source familiar with US-India talks said.

“They (the US administration) have to take care of their allies, strategic partners. Under sanctions from the beginning, there was talk of a gradual reduction and not going to zero on one stroke,” said the source, who did not wish to be identified due to the sensitivity of the issue.

India, Iran's biggest oil client after China, has almost halved its Iran oil purchase since November last year. That was when Washington granted significant reduction exceptions (SREs) from sanctions to countries, including India.

“Under SREs we hope they will give us relaxation and allow us to buy some Iranian oil," the source added.

China, one of Iran's biggest oil export markets, also criticised Washington's decision to tell Beijing and other governments to stop buying crude from Tehran or face sanctions.

China opposes Washington's “unilateral sanctions and long-arm jurisdiction,” said foreign ministry spokesman, Geng Shuang.