China Looks To Capitalize On Cheap Iranian Oil

It’s been a week since President Donald Trump announced that he would withdraw from the Iranian nuclear deal reached in 2015 and impose so-called powerful economic sanctions against the Islamic Republic over its nuclear development.

“This was a horrible one-sided deal that should have never, ever been made,” Trump said in an 11-minute address from the Diplomatic Reception Room of the White House on May 8. “It didn’t bring calm, it didn’t bring peace, and it never will,” he added.

The U.S. Treasury stated that it was giving companies three to six months to wind down their contracts, including purchases of Iranian crude oil. U.S. sanctions on Iran block American firms from doing business in the country, but even more controversial, it also prohibits foreign companies that do business there from accessing the entire U.S. banking and financial system.

Digging in its heels

Iran, for its part, has stated that it will remain in the deal as have EU members that were part of the original deal hammered out by then-President Barack Obama. Shortly after the sanctions announcement last week, Obama said that Trump’s withdrawal would leave the world less safe, confronting it with “a losing choice between a nuclear-armed Iran or another war in the Middle East.”

A few days later, the French government, which had lobbied with Trump to not pull out of the accord, said that Europe was prepared to introduce measures to nullify the effect of Trump imposing sanctions on any non-U.S. firm that continues to do business with Iran.

One reason France is adamant over the Trump announcement comes from French oil major Total’s recent $5 billion deal to extract gas from Iranian fields. The 20-year deal was reached with National Iranian Oil Co. and China National Petroleum Corp. (CNPC) last year to develop phase 11 of the massive South Pars offshore gas field. South Pars is considered the world’s largest natural gas field and could help Iran also become a major gas exporter, both pipeline gas into Europe as well as LNG exports once necessary infrastructure is put in place.

However, the U.S. is firing back at EU resistance. John Bolton, Trump’s newly installed National Security Advisor, said that “the Europeans will see that it’s in their interests to come along with us” rather than continue with the 2015 deal, under which major European corporations have signed billions of dollars of contracts in Iran.

How much impact?

While the politics of Trump’s sanctions decision plays out not only across the Atlantic with U.S. traditional allies but in the Middle East, other ramifications have to be examined, including just how much sanctions would curb Iranian oil exports – and that answer depends on who you ask.

Some analysts have predicted that re-imposed sanctions on Iran would remove around 600,000 barrels of oil per day, which would of course tighten global oil supplies which are already being stretched thin among the OPEC/non-OPEC production cut put in place at the start of last year.

Other analysts see that figure a bit lower, initially removing around 200,000 barrels per day (bpd) and within six months increasing to 500,000 bpd.

Yet, in a worst-case scenario for tightening oil markets but a boon for both OPEC and non-OPEC producers alike looking to capitalize on higher oil prices, commodities data provider S&P Global Platts cites analysts that predict 1 million bpd will be removed from the market due to re-imposed Iranian sanctions.

Asian oil markets impact

Three of Asia’s top buyers of Iranian oil will be impacted, yet in different ways. Long-time U.S. allies Japan and South Korea are expected to reduce their oil procurement from Iran, while China will increase its purchases of Iranian oil, Mriganka Jaipuriyar, Associate Editorial Director, Asia & Middle East Energy News & Analysis for S&P Global Platts, told OilPrice.com.

“This is expected to benefit Chinese state-owned refiners, who could find themselves in a favorable position to buy abundant supply of Iranian crude oil at attractive prices,” she said.

Jaipuriyar added that since South Korea and Japan are U.S. allies they “would be keen to abide by the Trump administration's foreign policies as they require U.S. support and influence in their quest to completely denuclearize North Korea and improve diplomatic and economic ties with Pyongyang this year.” She added that both countries are also more capable of diversifying their crude sources.

China, however, particularly amid ongoing trade tensions with the U.S., will likely take advantage of the demand gap left by South Korea and Japan.

Any increase in Iranian oil purchases by China will also pit Iran, OPEC’s third largest producer, against regional rival Saudi Arabia and Russia, the world’s top oil producer, for market share in China, the world’s largest oil importing country. Iran, for its part, will likely offer incentives to lock in more Chinese markets share, especially in light of Saudi Arabia recently raising the official selling price (OSP) of its Arab Light crude to Asia, a move that has caused Chinese state-run Sinopec, Asia’s largest refiner, to trim its Saudi oil imports, a development that I discussed in an April 17 post.

By Tim Daiss for Oilprice.com