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Traders Look To Replace Iranian Crude Oil As Sanctions Loom Again

A gas flare on an oil production platform in the Soroush oil fields is seen alongside an Iranian flag in the Gulf
A gas flare on an oil production platform in the Soroush oil fields is seen alongside an Iranian flag in the Gulf

Buyers of Iran’s crude oil are winding down their business with the Islamic Republic after U.S. President Donald Trump’s decision to pull out of the nuclear deal between Iran and world powers and reimpose sanctions.

President Donald Trump said May 8 Washington was withdrawing from Joint Comprehensive Plan of Action (JCPOA), the deal that suspended sanctions on Tehran in exchange for Iran curbing its nuclear ambitions.

Immediately after President Trump’s announcement, the U.S. State Department said the new sanctions will include measures aimed at Iran’s oil and shipping sectors, with a six-month “wind down” period “to allow companies to end contracts, terminate business, (and) get their money out.”

Meanwhile, Brent, the global crude benchmark, rose substantially reaching more than $77 per barrel.

According to Reuters, Asian refineries have already started preparing themselves for replacing Iranian crude.

“President Trump is clearly articulating that he has minimal desire in an alternative agreement with Iran,” said Ehsan Khoman, head of research for Middle East and North Africa at Mitsubishi UFJ Financial Group.

It is highly likely, Khoman believes, that a special formula used for buying Iranian oil during the time of international sanctions is going to be revived.

Based on that formula, buyers will ask for a six-month exemption from U.S. penalties in exchange for reducing the amount of crude purchased from Iran by 20 percent every six months. This formula, during pre-JCPOA years, halved Iran’s oil exports and limited it to nearly one million barrels per day in exports.

Southern Pars oil field in the Persian Gulf.
Southern Pars oil field in the Persian Gulf.

Iran’s oil exports hit 2.6 million barrels per day (bpd) in April, according to the Oil Ministry, a record since the lifting of sanctions.

China and India bought more than half of the oil after sanctions were lifted in January 2016. Europe currently buys 700,000 bpd of Iranian crude.

Tehran has also recently started exporting 100,000 barrels a day of its crude to Russia.

Japan's Foreign Minister Taro Kono said May 9 that his country had supported the nuclear deal, which "helps to strengthen international non-proliferation and the stability in the Middle East.” While he did not make a commitment to end imports of Iranian crude to avoid U.S. sanctions, he said Japan would "carefully analyze the impact” the U.S. withdrawal would have.

"Certain U.S. allies, including Japan and South Korea, may comply with the proposed U.S. re-imposition of Iranian sanctions on the concern of losing the U.S. security umbrella vis-à-vis North Korea,” said Khoman.

Trade data already shows a reduction of Iranian oil supplies to Japan and South Korea, and refinery sources confirmed they had started shifting purchases to other suppliers in preparation for renewed sanctions, Reuters reported.

Iranian crude oil shipments to Japan and South Korea have fallen by half from their post-sanction peak in March 2017, hitting just over 300,000 bpd in April, according to ship tracking data from Thomson Reuters Eikon.

The biggest single buyer of Iran's crude is China, whose imports peaked at about 900,000 bpd in mid-2016 but have dropped to around 600,000 bpd in 2018, according to Thomson Reuters ship-tracking data.

A senior official with a Chinese oil major, who declined to be named because he is not authorized to speak to the media, said new sanctions would hurt Chinese refiners by pushing up the price of crude oil, the most important feedstock for the petroleum industry.But Chinese refiners say there are alternative suppliers, especially in Russia, Saudi Arabia, and West Africa.

"We are more worried about what such political action will do to the outright price of oil, rather than whether it will create a real supply shortage," said another Chinese refining manager, who also declined to be named.

In India, refiners hope they can continue importing Iranian oil.

During the last round of sanctions, India enjoyed waivers allowing limited Iranian oil imports paid for in rupees instead of U.S. dollars.

"The impact (of new sanctions) in India will be there, but not so high," said R Ramachandran, head of refineries at state-owned oil firm Bharat Petroleum Corp.

When sanctions were loosened against Tehran in 2016, India ramped up imports from Iran to almost 900,000 bpd in late 2016, but intake has fallen back to around 500,000 bpd since the start of the year.

In the meantime, Saudi Arabia has pledged to help stabilize global oil markets in the wake of the Trump administration’s decision.

Reporting partially based on Reuters, Bloomberg