Increase in Iran's 'Cheap Oil' Exports Amid Decline in Saudi Production

Iran's crude oil exports have reached their highest level in five years in recent months as the country sells more oil to China and other buyers. According to the Wall Street Journal, Iran is adding a substantial volume of its crude oil to the energy market at a discount, amid concerns over global demand. The increase in Iran's oil supply poses a threat to Saudi Arabia and other major crude oil producers who are trying to raise prices by cutting production. Oil prices have dropped by about one-fifth since late last year, primarily due to fears of a slowing global economy and the influx of cheap Russian oil in the market. The rise in Iranian oil exports also indicates how the country is increasingly circumventing U.S. sanctions, as the Biden administration continues to negotiate quietly with Tehran in an effort to secure the release of American prisoners in Iran and curb its growing nuclear program. According to available data, Iranian oil shipments in May and June averaged about 1.6 million barrels per day, more than double compared to the previous year. This is the highest level of Iranian oil exports since 2018, which had faced a downturn due to U.S. sanctions. While providing exact figures and the final destination of Iran's oil sales is challenging due to the often clandestine nature of these transactions, data from several companies monitoring global energy trade indicates that China remains the primary customer. According to Kepler, Beijing directly imported 359,000 barrels of Iranian oil per day in May, up from 266,000 barrels in May of the previous year. Oil observers say that Iran's actual sales to China are likely much higher and include oil transferred through other Asian and Middle Eastern countries. China has repeatedly stated that it does not comply with U.S. sanctions against Iran, but since Washington reimposed sanctions, it has rarely disclosed its oil import data from the Islamic Republic. Syria and Venezuela are also major buyers of Iranian crude oil, both of which are under U.S. sanctions. Iranian traders report that Iran is also seeing increasing interest in its oil from other buyers in Latin America and Africa. Iranian oil officials say that the country offers about $30 per barrel discount compared to its Gulf rivals, including Saudi Arabia, and competes in the global market with cheap Russian oil. One of the current winners is China, which is buying cheap oil from Iran and Russia, storing or hoarding it to avoid problems if oil prices rise in the future. According to available data, Beijing added about 1.77 million barrels of oil per day to its reserves in May, the highest since July 2020. Iran is a member of OPEC, the Organization of the Petroleum Exporting Countries led by Saudi Arabia, but its production quota in this cartel has been suspended due to U.S. sanctions. The increase in Tehran's oil exports undermines Riyadh's efforts to keep prices high by limiting production. Brent crude oil prices, the international oil benchmark, have fallen by about 20% since OPEC and its allies led by Russia, known as OPEC+, first shook the market by cutting their production by two million barrels in October. In April, some of the largest members of this group, including Saudi Arabia and Russia, reduced oil sales by another 1.6 million barrels per day. Last month, Saudi Arabia announced that after an agreement with other OPEC+ members to adhere to current production targets until the end of the year, it would cut another million barrels per day from its July production. Earlier this week, Riyadh extended this reduction until August. According to some analysts' estimates, Saudi Arabia needs oil prices above $80 per barrel to finance its extensive economic program. Meanwhile, Iran announced in May that it had increased its oil production to over three million barrels per day, while before the U.S. withdrawal from the Iran nuclear deal in 2018 and the reimposition of sanctions, this figure was about 2.5 million barrels per day. Iranian officials say that the country, which established diplomatic relations with Saudi Arabia, its regional rival, earlier this year in a China-mediated agreement, is filling the gap in the global market created by Riyadh's production cuts and benefiting from Beijing's interest in buying cheap oil. According to Abdolnaser Hemmati, former head of Iran's Central Bank, the country, whose oil is its largest source of foreign currency, earned $28 billion from crude oil sales in the last solar year, which ended in March 2023, nearly four times more than in 2021. This cash flow is a lifeline for Iran's economy, which is affected by high inflation and the collapse of its national currency. The growing oil exports from Iran amid the latest diplomatic efforts between Washington and Tehran potentially place Tehran in a better position. While the Biden administration appears focused on reducing tensions that have escalated this year, it seems unlikely to offer significant concessions to Tehran as the U.S. presidential election campaign approaches. In addition to oil, Iran also sells other hydrocarbon products to countries like India and Kenya. This report is based on the Wall Street Journal.