One country must be quite pleased with the prospect of new U.S. economic sanctions against Iran’s oil industry, and this country is the largest oil importer in the world, and is Iran’s largest single oil client.
When China launched its long-awaited yuan-priced oil futures last month, it did so as part of its strategy to expand the international clout of its currency. Now, with U.S. sanctions on Iran’s horizon, the yuan could further advance down this road, as Beijing has vowed to continue buying Iranian crude, which will most likely be paid in yuan.
Iran should be on board with the idea. The country has made it clear even before President Trump’s withdrawal from the JCPOA that it would prefer to settle its trade in currencies other than the greenback, to which it has limited access.
Last month, Tehran and Moscow inked a deal to conduct all its business in goods rather than in dollars as both seek to reduce the influence of the U.S. currency on their economies. A month earlier, Iran banned settlement of import deals in dollars and ditched the currency in favor of the euro in reporting its forex reserves. In other words, Iran will be more than happy to take in Chinese yuan for its crude, or alternatively, to apply some oil-for-goods exchange scheme similar to the one agreed with Russia. Related: Biofuel Breakthrough Uses Algae To Create Hydrogen
The point is that those one million barrels daily that new Iran sanctions are supposed to take off the market may not in fact be taken off the market. Analysts are citing this figure because that’s how much Iranian crude left global markets during the period when both the U.S. and the EU had sanctions in place against Tehran.
But then they agreed to the Joint Comprehensive Plan of Action, commonly called the Iran nuclear deal, and sanctions were lifted. This time, Washington is playing the sanction game alone. The European signatories to the deal have made it abundantly clear that they are not pulling out just because Washington is doing it.
Germany, one of the signatories, has also said it will protect its companies doing business in Iran. Chances are that France will follow—Total has a major interest in Iran’s South Pars gas field. On top of that, Europe is the largest buyer of Iranian oil—collectively European countries bought 624,000 bpd on average last year. Related: Higher Oil Prices Look Likely
Unlike last time, everyone wants to continue buying Iranian oil, and although some may be forced to buy less, China is not bound by any economic or national security dependence on the United States. Iran, for its part, needs markets for its oil, even if it sells it for yuan and then converts the Chinese currency into, say, euros, which will come at a cost. After all, it’s better to sell more cheaply than not to sell at all.
What’s more, China will likely increase its investments in Iran’s oil industry. Iran is part of Beijing’s One Belt, One Road infrastructure investment initiative, and securing a chunk of Iran’s oil industry is a natural element of the initiative. Buying Iranian oil for yuans will only complement it.
Settling Iranian imports in yuan is just the beginning. In the long run, it would make sense for many oil trades to be carried out in the currency of the top importer. But it will take years for the yuan to undermine the dollar as the ultimate petrocurrency, and it would also involve risks, some observers familiar with Robert Triffin’s Dilemma have noted. In the short term, however, the U.S. sanctions may well be presenting a win-win situation for China and Iran.
By Irina Slav for Oilprice.com
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