Oil, Iran And The Elephant In The (Crude) Room
On his first day in office, President Joseph Biden signed a raft of executive orders to reverse actions by his predecessor Donald Trump. Conspicuously missing from the pile was an order to cancel sanctions on Iran’s oil exports, or at least provide some relief to a country subjected to two years of Trump’s “maximum pressure” campaign.
Biden’s Treasury Secretary pick, Janet Yellen, told the Senate during the same week that she intended to review all US sanction policies to ensure they were being applied effectively and correctly. With Iran, especially, Yellen said the administration was committed to ensuring the Islamic Republic took “appropriate steps” to comply with oversight on its nuclear program. She emphasized:
“Iran will only enjoy sanctions relief under the JCPOA if it complies with its nuclear constraints. Furthermore, if confirmed, I will ensure that Treasury continues its important work to combat Iran’s support for terrorism and abuse of human rights.”
Despite the rhetoric, few believe Iran will be denied the sanctions relief that it seeks from Washington. The question is how quickly it will happen, and what impact it will have on supply and prices when it happens.
The JCPOA, or the Joint Comprehensive Plan of Action, is a six-nation agreement the United States concluded in 2015 with Britain, China, France, Germany and Russia to limit Iran’s nuclear ambitions.
Under the Obama-era accord, Iran basically agreed not to make an atomic bomb with which to threaten the world (read: Israel). In return, it got to export its oil with little or no restrictions. Since Trump withdrew the United States from the deal in 2018 and put sanctions on Iranian oil, Biden has to bring Washington back into the fold and officially terminate the sanctions. At least, that’s how it’s supposed to work.
But that’s not what’s happening. Tehran is already exporting some—or if you believe its officials, quite a bit—of its crude. Worse, it might be continuing to enrich weapons-grade uranium while doing so.
Iran’s oil exports are set to exceed 600,000 bpd, or barrels per day, the first time since April, according to data from Geneva-based Petro-Logistics reported by Bloomberg. For January alone, the country’s crude shipments rose 30,000 to 50,000 bpd, SVB International, a Washington-based consultancy said, although there was no certainty if the extra Iranian barrels were sold to refiners, or moved in anticipation of later sales.
More To Iran’s Oil Exports Than Known?
Officials in Tehran indicate that those oil numbers are just a fraction of the real activity going on in their country. Iran’s Deputy Oil Minister Amir Hossein Zamaninia said production was expected to reach pre-sanctions levels in one to two months. Output peaked at around 4.0 million bpd before the exports clampdown by Trump. Oil Minister Bijan Zanganeh, meanwhile, boasted that Tehran “set the highest record of exports of refined products in the history of the oil industry during the embargo period”.
Neither the oil minister nor his deputy spoke about nuclear enrichment, of course. Iran’s leadership asserts that its nuclear activities are peaceful. Few outside the Islamic Republic believe that though.
It’s also hard to know if Zamaninia and his boss are telling the truth about oil, although one thing’s certain: such bravado might not have been possible during the Trump era. Any outspokenness at that time would have invited scrutiny on any country that had dared defy US sanctions to collude with Iran and brought pain to both buyer and seller.
At the weekend, Indonesia seized two vessels—one Iranian-flagged and the other Panamanian—that were illegally transferring oil in the country’s waters. The story fits the cat-and-mouse game that the Iranians played with the Trump administration for more than two years: ship-to-ship transfers, shell companies and silenced satellite signals—the same modus operandi deployed by Venezuela, another major oil producer subjected to Trump’s “maximum pain” campaign.
Biden may be compelled to act tougher on Venezuela due to its political dictatorship, but that’s another story. Politically, his reticence with Iran is understandable: It doesn’t augur well for him to rigidly enforce Trump’s policies, particularly when they’re so radically different.
Thus, Iran is emboldened to openly source for oil customers and is likely to be knocking on the doors of an old friend: China.
China was Iran’s top crude, condensate importer, before Trump’s sanctions went into effect in 2018. And for a long time after that, some Chinese refiners continued to transact secretly with Iranian exporters using the clandestine methods described earlier.
China Will Be Eager For Iranian Oil
A crude dealer at a European brokerage in New York, who has experience transacting Iranian barrels for the Chinese market, said the “sour”, or high-sulfur, crude grade was ideal for the “teapot”, or small, refineries in China’s Shandong hub. Speaking on conditions of anonymity, due to the sensitivity of the matter, the dealer said:
“These deals are being made even as we speak. Both Iranian and Venezuelan crude are just the right kind of sours that the Chinese teapots need. Due to Trump’s sanctions, these Chinese refiners have been buying even US crude, which isn’t really perfect, and blending them with other grades to turn into products. Iranian crude won’t give them those problems. Quality aside, it is also much cheaper than US crude. Throw in the logic of shipping and storage within the same region, and buying from Iran becomes a no-brainer for the Chinese.”
Iran may be getting its markets back, but it wants more. Oil Minister Zanganeh pressed the United States this week to return to the nuclear pact, promising that Tehran will fulfil its end of the bargain if sanctions on its crude are lifted.
Iran has good reason to make such a promise. A halt to sanctions will restore legitimacy to its oil shipments, ensuring no penalty for buyers. More importantly, it will reopen to Tehran key lines of international credit shut down by the State Department and Treasury under Trump.
The White House, in keeping with its own agenda, has said it does not expect a quick decision on Tehran. Biden’s pick for Secretary of State, Tony Blinken, said the administration was “a long way” from returning to the nuclear pact, and will consult with Israel and the Gulf states before acting.
Even so, reality may force Washington’s hand on the matter faster than it expects. And the catalyst for that will likely be Iran’s nuclear program.
An International Atomic Energy Agency report issued earlier this month, and viewed by The Washington Post, states that Iran has begun working on equipment needed to produce uranium metal, which can be used to produce nuclear warheads.
That represents a further Iranian breach of the JCPOA. Earlier this month, Iran said it had resumed 20% uranium enrichment at its Fordow facility, putting it closer to being able to enrich the 90% needed for a nuclear weapon.
Urgent Action Needed On Iran’s Nuclear Front
Omid Nouripour, a member of the German parliament’s foreign affairs committee, said Iran’s presidential election in June could bring in a new government that’s more in line with hard-liners within the inner circle of the supreme leader, Ayatollah Ali Khamenei, who has the last word in all key decisions. Nouripour adds:
“We are running out of time. Every single day we don’t talk, and there are no inspections, the centrifuges are running faster and faster.”
Russia’s Permanent Representative to the International Organizations in Vienna, Mikhail Ulyanov, also urges JCPOA custodians to move quickly.
Ulyanov warns that Tehran could terminate by Feb. 21 its commitment to International Atomic Energy Agency’s Additional Protocol and Safeguards Agreement. That will “dramatically reduce the chances of inspecting the state of affairs in Iran’s nuclear program”, he adds. Russia’s prodding for an Iran deal isn’t surprising given the “big brother” it has always played to Tehran, amid Moscow’s needs to balance US interests in the Gulf.
Diplomatically, it will be hard to hold Iran back too long from its demands. The Islamic Republic is still bitter over the killing of its top general Qassem Soleimani on Trump’s orders a year ago and the November assassination of its top nuclear scientist Mohsen Fakhrizadeh, who was hit by a remote-control weapon that Tehran believes was fired by Israel and an exiled opposition group. Prior to these, Iran was accused of masterminding in 2019 an attack on Saudi oil fields and the downing of an unmanned US drone. World powers are wary of an Iran that may turn belligerent again.
Should the United States drop its sanctions on Iran, the Islamic Republic can be expected to try and recapture the 2.0-2.5 million bpd in daily exports it lost during the Trump era.
It will be interesting to see how well OPEC, or the Organization of the Petroleum Exporting Countries, that Iran is also a member of, copes with the additional barrels in the market.
Oil Prices Just On The Mend After OPEC Cuts
After nine months of production cuts, the 13-member OPEC and its 10 allies steered by Russia—an alliance collectively known as OPEC+—managed to restore pre-pandemic prices of roughly $52 a barrel for US crude and around $55 for London’s , the global oil benchmark. Optimism over COVID-19 vaccines has been a factor.
If Iran puts just one million barrels on the market in short order, it will virtually negate the impact of the additional cuts of the same volume that the Saudis announced for February and March.
The so-called “surprise cut” by the Saudis gave crude an additional $5 bounce this month. On hindsight, the maneuver was possibly a Saudi hedge against the potential for US-Iran peacemaking on sanctions. That premium is likely to evaporate if the US moves toward an Iran Nuclear Deal 2.0, meaning oil prices could lose up to $5 per barrel once the talks are announced.
Market technicals could work in oil’s favor too.
Sunil Kumar Dixit, a commodities price technician at Kolkata, India-based SK Dixit Charting says of US crude:
“On the contrary, though logically unlikely, a sustained move above $53.80 can send it to $57 and $62. Such is the dynamism of the range now in oil.”
Supply Can Be Balanced, But Iran Won’t Compromise
The Iran factor may also be temporarily offset by a resumption in hostilities in Libya, another OPEC key member, which saw its crude and condensate output surge to around 1.25 million bpd earlier this month, its highest level in more than six years, after a ceasefire. But the Libyan situation is quite dynamic and its oil exports may resume with negotiations.
The Saudis could also announce deeper cuts of their own production to balance the market. This, however, comes at a price: Each cut barrel means lost market share to a rival. While the Saudis’ position as OPEC’s “swing producer” isn’t to be disputed, the question is how long could they go on sacrificing their own gain when the rest in the group barely care.
What’s certain is after more than two and a half years of Trump sanctions, that nearly destroyed its economy, Iran will be looking to max out its oil production and exports in its bid for recovery. It will be in no mood for any compromise with OPEC, especially the Saudis, who gleefully sided with Trump throughout the “maximum pain” campaign.
Ann-Louise Hittle, strategist at energy consultancy Wood Mackenzie, puts it succinctly:
“Iran is an ‘elephant in the room’.”
May I add, for precision: The crude room.
Disclaimer: Barani Krishnan uses a range of views outside his own to bring diversity to his analysis of any market. He does not own or hold a position in the commodities or securities he writes about.