In more dour news for Iran, India (the world’s fourth largest oil importer) is planning to cut oil imports from the embattled OPEC member. India’s oil ministry has asked refiners to prepare for a ‘drastic reduction or zero’ imports of Iranian oil from November, Reuters said on Thursday, citing two industry sources.
The news comes as Tehran remains defiant over impending U.S. sanctions renewal and just days after India indicated it would push back against pressure from Washington to halt Iranian oil imports, stating that it did not recognize sanctions the U.S. has threatened to impose on countries that continue to buy Iranian oil after November 4.
"India does not recognize unilateral sanctions, but only sanctions by the United Nations," Sunjay Sudhir, joint secretary for international cooperation at India's petroleum ministry, told CNN earlier when asked whether India would reduce oil imports from Iran. After China, India is the largest buyer of Iranian crude oil.
President Trump said on Tuesday that the U.S. would level sanctions on countries that not did not cut Iranian oil imports.
Though India made an initial defiant stand, it simply can’t afford to alienate Washington since it has to safeguard its exposure to the U.S. financial system, a powerful tool that the U.S. can wield as it pleases since the dollar is the world’s reserve currency. This allows Washington to level crippling sanctions on a wide range of countries all the way from Russia to Venezuela to Iran and anybody else that any sitting U.S. president sees fit to punish. Related: Stranded BP Cargoes: A Red Flag For Chinese Oil Demand?
This economic weapon is also why Beijing is working feverishly to supplement or replace the U.S. dollar as the world’s reserve currency. In September, John Hardy, the head of FX strategy at Saxo Bank said China was “eyeing the benefits of having its own currency play a larger role and to supplant the USD's role in global trade. The initial focus is on the global oil trade, where it has announced the intention of buying oil in yuan and allowing trade partners to settle that yuan in gold." He added that settling in gold is a clever move by Beijing as it provides oil-exporting countries with a greater degree of comfort.
Scouting for oil supply alternatives
One of the Reuters sources on Thursday added that India’s oil ministry had held a meeting with refiners that day, urging them to scout for alternatives to Iranian oil. “(India) has asked refiners to be prepared for any eventuality, since the situation is still evolving. There could be drastic reduction or there could be no import at all,” said another source.
All of this first perfectly into the revamped U.S.-Saudi playbook over both global oil markets and geopolitics in the Middle East. Though Trump took a hard line against the Saudis during the 2016 presidential campaign, even calling for a halt to all Saudi oil imports to the U.S., as president he has become more pragmatic, working with Riyadh on a wide range of issues as the Saudis jockey for geopolitical hegemony over Iran in the Middle East.
Trump tweets impacts global oil
Trump, for his part, delighted the Saudis when he announced that sanctions would be reactivated against Iran, while the Saudis have seemingly become docile as Trump uses Twitter as the presidential bully pulpit to pressure OPEC to keep prices from spiraling out of control and hurting the U.S. economy ahead of the November mid-term congressional elections. All 435 seats in the House and 35 of the 100 seats in the Senate will be contested. The outcome of the election could largely dictate how the second half of Trump’s four-year term unfolds. Related: Oil Rig Count Falls Amid Stagnating Production
Trump said in another tweet on Saturday that Saudi Arabia’s King Salman had agreed to his request to increase oil production “maybe up to 2,000,000 barrels” to offset production from Iran and Venezuela.
“Just spoke to King Salman of Saudi Arabia and explained to him that, because of the turmoil & disfunction in Iran and Venezuela, I am asking that Saudi Arabia increase oil production, maybe up to 2,000,000 barrels, to make up the difference ... Prices to high! He has agreed!” Trump tweeted.
Some U.S. sanctions against Iran take effect after a 90-day “wind-down” period ending on August 6, and the rest, notably in the petroleum sector, following a 180-day “wind-down period” ending on November 4.
By Tim Daiss for Oilprice.com
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If, however, India does succumb to American pressure and does halt its Iranian oil imports, China will no doubt come to the rescue by increasing its purchases of Iranian oil.
Moreover, India could easily withstand any pressure from the United States not only because it is the world’s third biggest economy after China and the United States based on purchasing power parity (PPP) but also because the US dollar is not the only reserve currency in the world. The yuan, the euro, the yen and the pound are all world reserve currencies. Furthermore, the introduction of the petro-yuan is already starting to undermine the petrodollar in the oil trade and also the effectiveness of US sanctions in general.
President Trump’s request to Saudi Arabia to raise its production by 2 million barrels a day (mbd) shows he is not au fait with the machinations of the global oil market. While Saudi Arabia doesn’t refuse any requests from the United States, it is a myth that it can raise its oil production by 1 mbd let alone 2 mbd. Furthermore, Saudi Arabia’s claim that it has a spare production capacity of 2 mbd is highly questionable.
President Trump’s request was motivated by two factors. The first is a psychological warfare aimed at promoting the impression that US sanctions against Iran will lead to a decline of Iran’s oil exports by 1 mbd. The other is that he doesn’t want oil prices spiralling out of control and undoing the economic boost from his tax cuts thus leading to losses by his Republican party in the midterm elections in November this year where all 435 seats in the House and 35 of the 100 seats in the Senate will be contested.
By lifting its oil production in response to President Trump’s request, Saudi Arabia will be working against its own interests’ and those OPEC members who all need an oil price far higher than $80 a barrel to balance their budgets.
Dr Mamdouh G Salameh
International Oil Economist
Visiting Professor of Energy Economics at ESCP Europe Business School, London
Realistically, countries like China or India are too big for the US to sanction. if the US were to impose sanctions on countries like China or India, the blow back would be immense & the US could very well lose trillions of dollars, not to mention undermining it's already rapidly diminishing soft power & global reputation under the Trump administration.
Now another possibility is that India might be looking to alarm the Iranians in a bid to receive a better deal, while simultaneously trying to appease the US with words of assurance. Another issue for a country like India, potentially looking to cut out all oil imports from Iran, is replacing Iranian oil with a reliable & feasible alternative. Of course the Saudi's have promised to ramp up their oil output by 2 million barrels per day, however you have to keep in mind that Iran's oil output is 4 million barrels per day. So although 2 million barrels per day would surely not replace Iran's oil output, it could be a start.
The problem is that, according to many analysts in the field, Saudi Arabia is already pumping out oil at or near full capacity. As a result, increasing their output by 2 million barrels per day would require alot of added infrastructure. That would cost quite a bit of money & resources, it would take some time. Like one analyst put it "It's not like ordering a coffee" Not to mention the fact that the Saudi's are currently stuck in a very costly quagmire in Yemen with no end in sight.
One question that has to be asked is this: Would such an increase even benefit the Saudi's from a business standpoint ? If so, why haven't they already increased their output or why hadn't they at least planned to do so earlier ? What is obvious is that after a certain threshold, it simply wouldn't be cost effective for the Saudi's to be pumping out more oil. Why would the Saudi's want to pump out so much more oil, spend so much more doing so, increase their own expenses & take the risk of drastically reducing their own profit margin ?
In any case, in the end, Europe, China, Russia & Turkey, are standing firm against US pressure & Iran has spent decades perfecting the art of bypassing sanctions. Iran also has solid relations with all of its neighbors and so when you put all of these things together, the most likely outcome is that the US sanctions on Iran will probably fail to achieve the goal of bringing Iran back to the negotiating table.
The fact that so many large & powerful nations are opposing the will of the US makes it more likely than ever that the world will look for alternatives to the petro-dollar, for example the petro-yuan. It also doesn't help the US's case against Iran, when the US is simultaneously imposing harsh tariffs on many of the same countries that it's pressuring on the Iran issue. The devaluation of Iran's currency could also backfire on the US as it will force Iran to become more self sufficient than it already is & it will make Iranians more likely to buy cheaper Iranian made products as opposed to expensive foreign counterparts. Also, at a time when Iran really needs to boost non oil exports, the devaluation of iran's currency will most likely help increase Iranian exports by making Iranian products cheaper & as a result more attractive for foreign buyers. Not many people realize that Iran produces over 1.5 million cars per year & actually Iran produces every single product under the sun. Previous sanctions have forced Iranians to become industrious & self dependent & now it looks as if that trend will only increase.