China has “Iran oil lever” over Trump playing out in trade dispute and at OPEC

China has “Iran oil lever” over Trump playing out in trade dispute and at OPEC
An oil tanker at Iran's Kharg Island export terminal from where Iranian crude is shipped. / Tasnim news agency.
By bne IntelliNews June 20, 2018

China has an “Iran oil lever” over Donald Trump which it is using to apply pressure in its growing trade dispute with Washington, CNBC reported on June 20.

After Trump unilaterally pulled the US out of the multilateral Iran nuclear deal—an accord still supported by Beijing and its other major power signatories—in early May, the White House moved to apply “highest level” sanctions against Tehran in an attempt at throttling Iran’s economy and forcing the Iranians to the table for negotiations on their role and activities in the Middle East. Crucial to that strategy is blocking exports of Iran’s economic lifeblood, namely its crude oil exports.

China, the largest importer of Iranian oil, “could tilt the world scales in determining how much Iranian crude will be taken off the world market”, the news report observed. Also, in the tit-for-tat tariff war with the US, China said last week it intended to put tariffs on US oil imports. While the US is not a major oil exporter, it has been growing exports and ships around 2mn barrels a day (b/d) of crude. About 300,000 b/d goes to China, and China could conceivably stop those purchases and replace them with Iranian oil.

Given the outlined scenario, “the US trade dispute with China, in a round about way, could determine how successful the US will be in sanctioning Iran's oil this time around—and that uncertainty is also playing out at OPEC [in advance of the June 23 discussions on agreeing new oil output quotas]”, the report added.

Buyers of Iranian crude in Europe and countries including Japan and South Korea are expected to slow down or stop buying Iranian supplies before the end of the year as US secondary sanctions on companies continuing to do business with the Islamic Republic bite. There are also indications that India, the second largest buyer of Iranian oil, is backing off from maintaining anything like its current levels of imported crude from Iran. Wary of US penalties, India's state bank has warned that there may be difficulties in agreeing financing for Indian refiners buying Iranian oil.

As the first and second biggest buyers of Iran’s oil exports, China and India import around 700,000 and 550,000 b/d, respectively.

Estimations of how much Iran’s oil production will drop off in the face of the new US sanctions regime, as well as the steady decline in Venezuelan output, will be a big factor at the Organization of Petroleum Exporting Countries talks on how much extra oil to pump into the market. The figure settled on will be crucial to OPEC’s production curbing agreement with Russia and other producers.

Presently, analysts say Saudi Arabia is believed to want to return 500,000 to 600,000 b/d to the market but Tehran has rejected the idea of OPEC members increasing output. Russia's energy minister has said Russia would like to return 1.5mn b/d in the third quarter this year and then take stock of the situation after that.

Threat of a $100 oil price
"If OPEC doesn't do something, I think we will see a $100 oil price," Scott Sheffield, executive chairman of Pioneer National Resources, involved in the US shale oil industry, told CNBC.

During the last period when the US directed heavy sanctions at Iran—prior to the signing of the nuclear deal in late 2015 and with the agreement of the other major powers—China used a system for purchasing Iranian crude with a separate entity and payment system that did not engage with the US banking system, thus preventing the triggering of secondary sanctions. Analysts believe it could use that method again to buy Iranian exports that would most likely come at a discount introduced by a grateful Iran.

"OPEC doesn't know if 200,000 or a million barrels of Iranian oil will be off the market," Sheffield reportedly added.

Iran exports around 2.4mn b/d. In the previous sanctions era, around 1.2mn b/d of Iranian oil could find no place on the market.

Saudi Arabia and Russia have said that they would like to return oil to the market given that their 18-month long effort to curb oil production by 1.8mn b/d has tackled the world oil glut and sent per-barrel prices higher.

Iran’s Petroleum Minister Bijan Namdar Zanganeh said on June 20 he does not expect an agreement to be formed among OPEC members on oil production at the upcoming discussions in Vienna, SHANA, a news agency under Iran’s oil ministry, reported.

Zanganeh complained that the rising oil price was mainly the Trump administration’s fault, as it had been caused by the drawing up of new sanctions to be imposed on OPEC members Iran and Venezuela.

"And now he [Trump] expects OPEC to change something for better prices," Zanganeh said. "This is not fair... OPEC is not part of the Department of Energy of the United States."

Russia's Energy Minister Alexander Novak said on June 19 that "demand for oil will rise sharply in the third quarter of the year... if we do not take action, we may be faced with a lack of supply... In our opinion, this can lead to an overheated market."

In addition to Iran and Venezuela, Iraq and Algeria have said that they are opposed to increasing OPEC production in spite of Iranian and Libyan production issues and Venezuela's decline in the market.

One market source told SHANA that the Saudi-Russian proposal to increase output by up to 1.5mn b/d was just a tactic to convince OPEC members to accept a hike of from 500,000 to 700,000 b/d.