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Simon Watkins

Simon Watkins

Simon Watkins is a former senior FX trader and salesman, financial journalist, and best-selling author. He was Head of Forex Institutional Sales and Trading for…

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U.S. Plays ‘Whac-a-Mole’ Game With Iran

The latest U.S. sanctions against Iran’s oil shipping network are the latest sign that the ongoing confrontation between the U.S. and Iran operates on a number of discordant levels of reality. At its furthest ends, this reality is defined by the U.S. wanting to remove the Islamic Revolutionary Guards Corps (IRGC) from Iran’s political and economic power structure by crippling its economy to such a degree that the people of Iran change the regime themselves.

On Iran’s side, it is defined by a power struggle between the relatively moderate Western-leaning politicians, led by President Hassan Rouhani, who want the IRGC to exclusively stick to military affairs and the IRGC that wants to run Iran as it was at the time of the 1979 revolution. At the centre of these forces is the level of Iran’s hydrocarbons exports, particularly of oil, where reality and fantasy mix.

The U.S. early on stated that its aim was to reduce Iran’s oil sanctions ‘to zero’. Statements since sanctions were re-imposed in earnest at the end of last year have been a virtual countdown of various benchmark levels through which Iran’s oil exports have supposedly dropped from their previous position of around 2.5 million barrels per day (bpd) before the U.S. signalled that it would withdraw from the Joint Comprehensive Plan of Action (JCPOA) last May. These have culminated in recent months to ‘below 2.0 million’, ‘below 1.5 million’, ‘below 1 million’ and so on. On the other side of this version of reality is the fact that China on its own is importing nearly 1 million bpd, and the trend is rapidly rising.

After the U.S. refused to extend China’s waiver on importing Iranian oil in May, China has been gradually increasing its oil imports from Iran, to the degree that the release of figures from China’s General Administration of Customs (GAC) at the end of August showed that, far from reducing its oil imports from Iran in line with U.S. sanctions, China imported 926,119 bpd of Iranian oil in July, up 4.7% month on month, from an already high base. According to various oil industry sources in Iran spoken to by OilPrice.com last week – and suspected by many more casual observers – the actual figure is much higher, with excess barrels being kept in floating storage in and around China, without having gone through Customs, meaning that they do not show up on Customs data but are there nonetheless, effectively as part of China’s Strategic Petroleum Reserve. Related: The Biggest Tech Play Of The Year Is Flying Under Wall Street’s Radar These oil export numbers do not include sizable exports – up to another 500,000 bpd or so, Oil Price.com understands - through other tried-and-tested methods that were operated with impunity during the last global sanctions period, even when they became tougher in 2011/12. The ‘rebranding’ of Iranian to Iraqi oil simply by switching the stickers on the sides of the tanker trucks moving oil across the enormous and porous border between the two countries remains a remarkably simple but remarkably effective technique. Another such technique is disabling – literally just flicking a switch – on the ‘automatic identification system’ on ships that are carrying Iranian oil, as is just lying about destinations in shipping documentation.

According to Iranian sources, some of this 500,000 bpd or so (on top of China’s near 1 million bpd) – all of which is discounted in price from the benchmark – go into some of the less rigorously policed ports of southern Europe that need oil and/or oil trading commissions, including those of Albania, Montenegro, Bosnia and Herzegovina, Serbia, Macedonia, and Croatia. From there, the oil can easily be moved across borders to Europe’s bigger oil consumers, including ‘through’ Turkey. There are also plenty of buyers elsewhere in Asia for Iran’s high quality oil, including India, Pakistan, and Malaysia, according to Iranian sources. Malaysia also allegedly plays a key role when required in forwarding oil exports to China, with tankers bound ultimately for China engaging in at-sea or just-outside-port transfers of Iranian oil onto tankers flying other flags, most notably recently, that of Malaysia. Iran had also been able to re-flag its vessels under the flag of Panama, until the U.S. began to vigorously enforce its shipping sanctions, In addition, as highlighted recently in the furore over the Adrian Darya 1 tanker, Iran continues to be a major supplier of oil to Syria.

All of this has occurred even after the U.S. re-imposed sanctions on Iran’s two key tanker firms – the National Iranian Tanker Company (NITC), and the Islamic Republic of Iran Shipping Lines (IRISL) - which had continued to offer oil cargoes not just at a substantial discount to the benchmark oil price but had also been offering cost, insurance, and freight (CIF) cargoes at free-on-board (FOB) pricing. In tandem with this, Iran, as it had done in the previous major sanctions period prior to 2015, has also continued to offer protection and indemnity (P&I) insurance, through the ‘Kish P&I Club’, among other such entities, OilPrice.com understands.

Related: Russia Considers Possibility Of $25 Oil Next Year

The latest attempt by the U.S. to prevent Iran exporting oil includes designating the Kish P&I Club for assisting in, sponsoring, or providing financial, material or technological support for, or financial or other services to or in support of the India-based Mehdi Group, which is the principal target of the new sanctions, together with former Iranian oil minister (from 2011-2013) Rostam Ghasemi. Specifically, the U.S. has now brought sanctions to bear on Ghasemi and an adjunct oil shipping network containing 11 tankers, seven of which are allegedly managed by the Mehdi Group. The entire network cited by the U.S. comprises Mehdi Group subsidiaries Bushra Ship Management, Five Energy Oil Trading, Fourteen Star Shipping Management, Khadija Ship Management, Penta Ocean Ship Management & Operation, and Vaniya Ship Management.

U.S. State Department official, Brian Hook, said that these are part for an “oil-for-terror” scheme that has moved about 10 million barrels of oil in recent months, largely to Syria. Hook also announced rewards of up to US$15 million for information leading to the disruption of financial support for the IRGC, including oil sales. U.S. under-secretary Sigal Mandelker added in a statement: “The Iranian regime is leveraging a terrorist organization as its chief conduit for obfuscating and selling hundreds of millions of dollars of illicit oil to fuel its nefarious agenda.”

Whether or not this will make any real difference remains to be seen, but it can be guessed at by contrasting U.S.-based estimates with official Chinese customs data (and then adding around 50%, for the aforementioned reasons). July’s figures are as instructive as any another’s in this regard. A number of these U.S.-based estimates were around the 100,000-120,000 bpd level of Iranian oil exports in July. Data from China’s General Administration of Customs, as mentioned, shows that China – just on its own - imported 926,119 bpd of Iranian in July.

By Simon Watkins for Oilprice.com

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  • Mehrdad Nematollahi on September 11 2019 said:
    The Iranian people who used to contribute in former elections , now are frustrated of the economic situation and in a campaign has threatened that they will NOT vote in the future elections! ( just the will attend if all the sanctions will remove).

    This issue will make happy the hardliners and IRGC .
    BUT THE MODERATORS will lose!
    So Rouhani should solve the problems with west , and if NOT ! IRGC will take control the government.

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