Iranian oil is once again pouring quietly into the world market Ship’s crew

(Bloomberg) –

Iran has been supplying this much crude oil for nearly five years, bolstering its re-emergence on the geopolitical stage while posing risks to a fragile global crude oil market.

Exports have risen to their highest level since US sanctions were reinstated in 2018, according to a number of analysts including Kpler Ltd., SVB Energy International, FGE and the International Energy Agency. Most of it goes to China, as the world’s largest importer purchases barrels from the Islamic Republic at a reduced price.

Soaring sales are the most tangible sign yet that the country — while still suffering financially from years of isolation — is reasserting itself by beginning to rebuild ties with regional rivals, nurturing ties with Asia’s leading power and even a has entered into preliminary diplomatic negotiations with Washington.

But the extra supplies are eroding confidence in an oil market weakened by flagging economic growth and cheap Russian cargo, and thwarting efforts by Iran’s partners in the OPEC+ alliance to set a floor for crude prices.

“Iran’s crude oil exports broke the record last month,” said Homayoun Falakshahi, a senior analyst at Kpler. “Iranian crude oil is extremely interesting for those willing to take the risk of buying it.”

According to the company, crude oil shipments have doubled since last fall, reaching 1.6 million barrels a day in May, even as American sanctions remain in place. The Paris-based IEA estimates production has reached 2.9 million barrels per day, the highest since late 2018. Advisors SVB Energy, Petro-Logistics SA and FGE I expect production to be even higher, perhaps exceeding 3 million barrels per day.

The recovery in inflows – severely curtailed after former President Donald Trump withdrew from a nuclear deal with Tehran in 2018 – could bolster an economy plagued by rampant inflation, currency depreciation and periodic unrest against hard-line President Ebrahim Raisi.

It coincides with other signs of an Iranian revival: a tentative deal with regional adversary Saudi Arabia in April, efforts to rehabilitate Syrian ally Bashar al-Assad and secret talks with the White House to defuse tensions.

Through negotiations between mediators in Oman and on the sidelines of UN meetings, Washington and Tehran are moving closer to an agreement on releasing American prisoners and exploring limits on Iran’s nuclear research in exchange for, according to a person familiar with the Iranian position, leeway to ship more crude oil.

A State Department official said rumors of a nuclear deal are “false and misleading” and that the US priority remains preventing Iran from acquiring a nuclear weapon. Iran claims its nuclear program is for peaceful purposes only.

But more supplies — in addition to inflows from two other OPEC+ members under sanctions, Russia and Venezuela — are already taking place, hitting global oil markets. Prices have fallen 12% this year in London to nearly $75 a barrel, prompting a spate of downgrades from forecasters including Goldman Sachs Group Inc. and JPMorgan Chase & Co.

Iran’s rebound has undermined efforts to stabilize the market by the Organization of Petroleum Exporting Countries and its leader Saudi Arabia, which this month announced another 1 million barrels a day production cut, albeit with little effect.

Since US sanctions were reinstated five years ago, Iranian crude has been shipped in a so-called “dark fleet” of tankers — often outdated and uninsured — to the few remaining buyers who disable transponders to avoid detection.

While tanker tracking shows that China remains Tehran’s main customer, official data recorded no imports from the Islamic Republic over the past year. Instead, purchases have skyrocketed from Malaysia, where Iranian cargoes are often sent to be transhipped on another ship, leaving the origin of the shipment unclear.

“These ghost kegs are not included in the official total,” said SVB Founder and President Sara Vakhshouri. But “while all of OPEC+ is trying to cut as much as possible, and Saudi Arabia is making a voluntary cut, every barrel counts.”

Chinese refiners — particularly smaller, independent companies in Shandong province — are stepping up buying Iranian cargo as price rebates offered by Tehran help offset the recent slump in profit margins, Kpler says.

According to Iman Nasseri, managing director of FGE in Dubai, Iran has had to increase rebates on its crude oil to compete with the flow of Russian crude oil being squeezed out of Europe by sanctions. Much of the increased inflow is fueled by crude oil being stored on tankers to meet demand, the companies say.

“China’s willingness to support Iran by taking over its sanctioned oil indicates a slight improvement in Iran-China relations,” said Greg Brew, an analyst at consultancy Eurasia Group. “All of this supports the view that Iran’s position is improving and normalization with other states in the region is progressing.”

It was Beijing that brokered the beginning détente between Iran and the Saudis – symbolic of the growing closeness both countries are seeking with the rising power of Asia – as rivals in the Middle East seek to quash decades of proxy conflicts like the ongoing war in Yemen defuse.

Aside from increased demand from China, some analysts have speculated that the rise was tacitly allowed by a US administration aimed at keeping gasoline prices under control. It might also help to turn a blind eye while the two countries work to establish a diplomatic channel.

“There is less enforcement of sanctions by a US government that wanted to fight Russian crude in the market while maintaining supply,” said FGE’s Nasseri.

Going forward, the impact of Tehran’s comeback on oil prices may be limited. Crude oil shipments to China could slow as authorities crack down on bitumen compounds traders suspect are used as a cover for denser and cheaper barrels being sold by Iran.

In any case, global oil markets are likely to run into a deep deficit for the remainder of the year as China’s post-pandemic recovery gathers momentum, the IEA predicts. In the second half of the year, demand will exceed supply by about 2 million barrels per day, more than enough to absorb additional Iranian inflows.

Crude oil traders remain skeptical about the forecast supply tightness, in part as the rising tide of barrels from Iran weighs on the outlook.

“Negative supply-side concerns are clearly shaping sentiment,” said Tamas Varga, an analyst at brokerage PVM Oil Associates Ltd. in London, adding that additional Iranian inflows are part of it.

–Featuring Sharon Cho, Serene Cheong, Alex Longley, Paul Wallace and Jonathan Tirone.

© 2023 Bloomberg LPShare

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