Iran will lower the price of its crude for Asian clients, who are its biggest buyers, Iran reported, citing a source from the country’s oil ministry who wished to remain unnamed. The source said, "The discount is part of the nature of the global markets being offered by all oil exporters." Yet for Iran right now, the discount is also an attempt to hold onto its biggest market as U.S. sanctions kick in.
The source confirms a Friday report by Reuters, which said the National Iranian Oil Company had reduced oil prices for Asian clients by between US$0.75 and US$0.90 a barrel, with prices for Western clients down by US$0.50 a barrel.
Iran’s Deputy Petroleum Minister for International Affairs had said earlier Saudi Arabia used the discount tactic to curb Iran’s international market share, but even so, the average amount of crude oil that Iran shipped abroad between late March and late July was 2.3 million barrels, IRNA notes. Now, the country is employing the discount tactic targeting mostly its top oil buyers: China and India.
China is particularly important for Tehran. “If China . . . buys Iran’s oil, we can resist the U.S., one Iranian analyst told the Financial Times last month. “China is the only country which can tell the US off.” Related: Is This The Most Important Geopolitical Deal Of 2018?
For now, there seems to be no danger of China suspending Iranian oil imports. Beijing has repeatedly asserted it will continue buying Iranian crude. The latest assurance came from the head of international operations at the China Petroleum and Chemical Industry Federation. Beijing did make one concession to Washington, however, when it agreed to keep its Iranian oil imports at current levels. Yet this may change as the trade war between the two heats up, analysts believe.
Meanwhile, the market is preparing for a supply squeeze of up to 1 million bpd as a result of the U.S. sanctions that could push crude prices a lot closer to US$100 than they are now.
By Irina Slav for Oilprice.com
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China is of course very important to Iran. China alone could neutralize US sanctions by two measures. One is to increase its purchases of Iranian crude which currently account for 750,000 barrels a day (b/d) or 35% of Iranian crude exports. The other is paying for its Iranian oil imports in the petro-yuan.
However, I hope Ms Slav and other analysts will heed what I have been saying that US sanctions against Iran are doomed to fail and Iran will not lose a single barrel of oil from its oil exports as a result of the sanctions. I was proven right on the withdrawal of the IPO of Saudi Arabia and I will be proven right again with US sanctions on Iran.
My reasoning is based on four market realities. The first is that the overwhelming majority of nations of the world including US allies and major buyers of Iranian crude are against the principle of sanctions on Iran as unfair and will not therefore comply with them and will continue to buy Iranian crude whether in violation of the sanctions or by a US waiver as would be the case with Japan, South Korea and Taiwan.
The second is the petro-yuan which has virtually nullified the effectiveness of US sanctions and provided an alternative way to bypass the sanctions and petrodollar.
A third reality is that China which is being subjected to intrusive US tariffs and Russia which has been battling US sanctions since 2014 will ensure the failure of US sanctions against Iran as a sort of retaliation against US tariffs and sanctions against them. The US would be making a huge mistake were it to underestimate the power of the Russian-Chinese strategic partnership which has led to the successful launching of China’s crude oil future contract (the petro-yuan).
A fourth reality is that 95% of Iran’s oil exports go to countries who have already declared that they will not comply by US sanctions, namely China (35%), India (33%), the European Union (20%) and Turkey (7%). The remaining 5% of Iran’s oil exports goes to South Korea and Japan who have already said they will apply for a US waiver and most probably they will get.
The US Administration’s claim that it will be able to persuade Iran’s oil customers to cut their crude imports from Tehran by as much as 1 mbd is more of self-delusion and wishful thinking coming from an administration that has antagonized virtually everybody including its own close allies.
Dr Mamdouh G Salameh
International Oil Economist
Visiting Professor of Energy Economics at ESCP Europe Business School, London