With U.S. sanctions set to snap back into place, Iran is bracing itself for another period of economic hardship and uncertainty. Critical to the success of the U.S. sanctions program is limiting Iranian oil exports. Earlier this year, the U.S. announced its intention to reduce Iran’s oil exports to zero, through unilateral action and pressure on the major consumers of Iranian oil. Now it’s time to see if that strategy will work.
A major question mark is India, a fast-growing energy market and a major consumer of Iranian oil and natural gas.
When new sanctions were announced, India began cutting imports from Iran, its third-largest energy supplier and the source for 10 percent of its total energy needs. India depends on imports to meet about 80 percent of its energy requirements. But total Indian compliance with U.S. sanctions was never set in stone.
India announced back in July that it would halt purchases of Iranian oil and gas in November. However, on Tuesday, Bloomberg reported that India was preparing to cut its imports of Iranian oil by half, in order to earn a waiver from U.S. sanctions. India plans to argue that it can’t obtain energy products from any other producer at competitive rates.
The announcement comes as U.S. policy-makers begin to reconsider the scope of its Iran embargo. They’ve now backtracked, projecting a 50 percent reduction in Iranian exports when sanctions are fully imposed in November. Under this outlook, Iran’s oil exports would fall to about 1 million bpd, the level reached by the previous sanctions regime in 2012-2014.
India has been negotiating with both sides as it looks to secure its energy future. Rising U.S. production has allowed India to take advantage of American exports: in July, the U.S. exported 15 million barrels, twice what it exported last year. But that still pales in comparison to what India has been importing from Iran, where it has been able to secure attractive trade arrangements.
Related: Who Profits From Iran’s Oil Major Exodus?
India and Iran have grown closer, with the massive joint Chabahar port project raising the prospects for increased bilateral trade between two countries that straddle the Arabian Sea. But Chabahar has been delayed numerous times, and with U.S. sanctions likely to cut deeply into Iranian oil exports it’s likely to be postponed yet again.
Iran, which is suffering from a cratering currency and growing internal dissent, is tightening its belt in anticipation of sanctions. But it’s also waging an all-out price war with its chief geopolitical competitor, Saudi Arabia, which supports the re-imposition of sanctions. Iran is slashing prices on all its grades for September, in an effort to entice Asian buyers to maintain imports ahead of November.
Right now, there’s uncertainty over how effective U.S. sanctions will be, or whether Iran’s customers will keep buying its crude or seek waivers. South Korea ceased purchases altogether when the new sanctions were announced in July, while Japan is likely to follow the U.S. line, as is the United Arab Emirates. Together the three countries consume about 20 percent of Iran’s energy exports.
China, along with India and Turkey, is a major customer for Iran’s energy: the three countries together amount to more than half of all Iran’s exports. China has argued that it needs Iran’s energy goods, and it won’t stop buying Iranian crude once sanctions kick in. Yet while China has the international clout and force of will to defy the U.S., India is in a weaker position: it has to continue playing to U.S. allies like Saudi Arabia and the UAE.
India is prepared to diversify its energy imports: the country has a “Plan D” for turning to alternatives should it fail to acquire a U.S. waiver. But for the moment, it appears to be maneuvering to maintain access to Iranian crude, taking advantage of the uncertainty surrounding the U.S. policy (and its chance of success) before the November deadline.
Related: Saudi Arabia And Iran Reignite The Oil Price War
One factor that gives everyone pause is how much oil prices may rise when Iranian crude starts disappearing from the market. Iranian exports have already begun to decline, and with little spare capacity left, U.S. production hitting infrastructure bottlenecks and geopolitical risk at an all-time high in several areas of production, the impact of U.S. sanctions could be greater than many realize. The IEA expects major challenges to preserving a balance in supply.
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Higher oil prices will hurt Indian Prime Minister Narendra Modi’s chances of re-election, and his government will likely do all it can to keep prices low. If that means maintaining access to cheap Iranian energy exports, India may defy the U.S. sanctions and continue its purchases.
By Gregory Brew for Oilprice.com
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