Iran's Customers Seeking Alternative Oil

Following the announcement of the U.S. withdrawal from the JCPOA and the re-imposition of oil and banking sanctions, reports indicate that Iran's oil customers are grappling with the consequences of this decision. The price of Brent crude oil increased by about 3% on Wednesday, May 8, reaching nearly $77. Reuters reports that Asian refineries are preparing for alternative oil sources to Iran. Ehsan Khammam, a financial expert at Mitsubishi, states that the return of oil sanctions and the reinstatement of six-month exemptions for Iran's customers is likely. During the sanctions period, the U.S. granted Iranian oil customers a six-month period to significantly reduce their imports from Iran. Although no exact figure for this increase was announced, it was common for Iranian oil customers to reduce their purchases by 20% every six months. Consequently, during the sanctions, Iran's oil exports halved to about 1 million barrels per day. Reuters notes that Iran's crude oil exports in the first quarter of this year were about 2 million barrels per day, and if oil sanctions and 180-day exemptions return, Iran's exports could decrease by 300,000 to 1 million barrels per day depending on other countries' compliance with U.S. sanctions. Khammam mentions that Trump explicitly stated in his speech announcing the U.S. withdrawal from the JCPOA that the highest level of sanctions against Iran would be imposed, and any country that assists Iran would face sanctions. 'Thus, there is little willingness in the U.S. government for a replacement agreement with Iran.' Sukrit Wizaikar, director of the energy consulting firm Trifka, also told Reuters that undoubtedly, Iranian oil customers will reduce their purchases from the Islamic Republic to avoid confrontation with U.S. sanctions later this year and next year. Peter Kiernan, an economist at the Economist Intelligence Unit, believes that U.S. allies, especially in Europe, are not in favor of dismantling the JCPOA and view it as the best way to prevent Iran from producing a nuclear bomb. Europe completely halted oil imports from Iran during the sanctions but currently purchases over 700,000 barrels of crude oil from Iran daily. Khammam suggests that Turkey, Russia, and China may oppose reducing oil purchases from Iran. Iran has recently begun exporting 100,000 barrels of oil daily to Russia, which Russian officials refer to as 'oil for goods,' while Iranian officials describe it with terms like 'oil swap' and selling oil for simultaneous cash and goods. The report also references comments made by Japan's foreign minister on Wednesday, who expressed support for the JCPOA but stated that the country is carefully examining the implications of U.S. sanctions. Khammam believes that South Korea and Japan are likely to comply with U.S. sanctions. Reuters reports that refineries in these two countries have shown they are seeking alternative producers and have reduced their oil purchases from Iran by about 50% compared to peak imports in March 2017, bringing the total down to 300,000 barrels. China, Iran's largest oil customer, which had increased its purchases to 900,000 barrels per day in mid-2016, has averaged 600,000 barrels over the past year. An unnamed senior Chinese official stated that the new sanctions would be detrimental to Chinese refineries due to rising oil prices. A Chinese refinery manager also mentioned that the issue is the rising oil prices, not Iranian oil. He stated that Chinese refineries have alternative options such as Russian, Saudi, and West African oil. Indian refineries are also hopeful to continue purchasing oil from Iran. India had increased its imports to 900,000 barrels per day in late 2016, but this year the figure has been around 500,000 barrels. Reuters notes that with a significant increase in oil demand in Asia and a reduction in strategic oil reserves in developed countries to 2.5 billion barrels, nearly returning to levels seen five years ago, experts say that the U.S. will also consider the balance of supply and demand when pressuring Iran's customers to reduce production. Eric Notal, director of Nine Point, states that the market is moving towards $80 oil, and global strategic oil reserves will reach their lowest level in the past 10 years by the end of this year. Saudi Arabia announced on Wednesday that it could cooperate with other producers to maintain market balance so that (Iranian oil sanctions) have the least impact on the market. OPEC members, along with several countries led by Russia, have committed to reducing their oil production by 1.8 million barrels per day from the beginning of last year until the end of this year, which is approximately equal to Iran's total crude oil exports. Meanwhile, Venezuela's oil production has sharply declined due to the country's financial crisis, resulting in OPEC and other countries' compliance with production cuts being significantly higher than the mentioned agreement.