Tehran left in the cold as old allies cut crude imports
Recent oil sales to Asia make for troubling reading for Iran's embattled government
Iranian officials' upbeat public pronouncements on their ability to ride out the escalated US-backed sanctions regime are beginning to sound hollow.
Tehran had hoped long-standing crude buyer China might withstand American pressure and continue to buy its oil-imports averaged 590,000bl/d in the May-October 2018 period, according to figures from consultancy SVB Energy International — but recent volumes are well down on this level.
According to figures from leading cargo tracking firm Kpler, Iranian exports to China were just 190,000bl/d in January, compared to 409,000bl/d in December. Given that China forms one half of a sizeable Asian demand double act with India, accounting for about 80pc of Iran's Asia-bound crude exports, China's new-found reticence spells difficult times ahead for Tehran.
China's Iranian crude imports averaged 449,093bl/d over November-December, down 27pc from 615,730bl/d over January-October 2018, according to customs data collected by oil market analytics consultancy OilX shows.
As stated by Kpler's Houston-based energy economist Reid I'Anson, two factors must be taken into account when assessing Iran's exports to China. One is that vessels loading in Iran heading to China "often fail to turn on their Automatic Identification System (AIS) for long periods of time" to avoid detection. Another is the likelihood that Chinese bonded storage available to Iran is running out.
China backs off
Iranian exports to China remain well down on the levels witnessed during the last extended period of sanctions endured by the country in the 2012-15 period. In those years it sold an average 448,000bl/d to Beijing, according to SVB figures.
China appears disinclined to bail Iran out of a tight spot, an attitude highlighted by state-backed Chinese Bank of Kunlun's decision in December to only clear Iranian-related financial transactions if these relate to humanitarian and non-sanctioned goods and services.
India, with which Iran has close economic relations, appears unlikely to provide significant relief. Its imports from Iran in January were just 234,000bl/d, according to Kpler. This is less than half of the May-October 2018 average of 563,000bl/d, as reported by SVB. "No Asian country is interested in risking their diplomatic and trade relations with the US over Iran. All the Indian private refineries halted their imports from Iran and only the public refineries are importing oil, with a high compliance with US waivers," says SVB CEO Sara Vakhshouri.
Iran has had time to prepare for the retrenchment of its major Asian customers, as the impact of renewed sanctions measures imposed by President Donald Trump's administration was felt well ahead of 5 November 2018. While this was the trigger date when the US reinstated all sanctions removed under the 2015 nuclear deal struck by President Obama, for Asian buyers of Iranian crude there was advance warning about the need to secure other sources of supply.
Many moved quickly to scale back their imports significantly. Japan cut its imports to zero in October, from about 150,000bl/d averaged over the previous five months, according to SVB figures. This led to 2018 proving the worst year for Iran's sales to Asia's top four buyers (China, India, Japan and South Korea) since sanctions were eased in 2015.
Iran holds its nerve
Despite question marks over the US's willingness to renew sanctions waivers handed to eight importers of Iranian crude — China, India, Japan, South Korea, Taiwan, Turkey, Greece and Italy — officials in Tehran are not yet reaching for the panic button.
The country's 2019-20 budget (starting in March of this year) indicates that policymakers still envisage significant exports to Asian economies over the next year. According to Vakhshouri, the budget is based on the sale of 1.5mn bl/d at $50/bl-well below its current level of exports.
There are some near-term straws of comfort, with Japan showing an unexpected appetite for Iranian crude in January. Kpler's I'Anson describes Japan's resumption of 157,000bl/d of Iranian imports in January as being the most significant of the monthly flows, given it had previously reduced its requirement to zero.
Some stop-gap measures have been implemented in a bid to mitigate the impact of the decline in Iran's Asia-bound shipments. In October last year, the government announced a programme to sell crude on a domestic energy exchange located at Kish, targeting private sector buyers. But the National Iranian Oil Company (NIOC) may struggle to facilitate getting paid for these barrels, considering complex structures involving part-payment in Iranian rials and foreign currency.
All this leaves Iran increasingly reliant on a dwindling band of major trading partners.
But their recent buying behaviour suggests sharp fluctuations could become the norm over the next few months, making it even tougher for Iran to budget on the basis of stable export earnings.
China is a case in point. Its imports of more than 400,000bl/d in December were halved the following month, according to Kpler data. Much of the increase in imported Iranian barrels in November and December went into strategic petroleum reserve tanks and bonded storage in north-eastern Dalian, where NIOC's leased storage tanks are located, says Florian Thaler, CEO of OilX, who notes that China tends to have a seasonally lower need during January and February compared to the fourth quarter.
Chinese imports may fall lower on the expected slowdown in stockpiling activities. "Most barrels delivered [in February] are likely to head to Maoming, Ningbo, Qingdao and Tianjin, where Sinopec's refineries are located," says Thaler, citing data from the S&P Global Platts cFlow platform.
In any case, much of the supply heading to China is in the form of condensate rather than crude oil. It is difficult for Iran to manage the volume of condensate production — largely a by-product of South Pars natural gas production intended for the domestic Iranian market — and needs to find export markets for this product.
China has been willing to store large volumes of Iranian condensate, especially as South Korea — which previously accounted for about three-quarters of Iranian condensate purchases — has sharply reduced its intake. Instead, South Korea has been importing condensate from the US.
According to Kpler, Iran's condensate exports are still looking solid for the moment. Of the 173,000bl/d sold in January, it says 69,000bl/d went to China and 36,000bl/d went to South Korea, with the remainder shipped without a tagged destination.
Waiver decision awaited
Looking ahead, all eyes will be fixed on May. Beyond that month, Iran's export ambitions will hinge on decisions made in the Oval Office about whether to extend the 180-day waivers, or "significant reduction exemptions" as they are officially termed.
The US State Department has stipulated that the current waivers will expire by 4 May. Fresh waivers would start 5 May for countries that the US deems have met their commitments to significantly reduce Iranian imports over the previous six months.
Some long-standing buyers — notably Italy, Greece and Taiwan — appear unlikely to be granted waivers since they have not taken up their full quotas of imports under current waivers. The largest buyers, such as China, India and Turkey, are likely to continue receiving reduced volumes of Iranian oil under the US waiver programme.
That comes as little comfort to Iran's budget planners. With exports this year falling well short of the 1.7mn bl/d level that it averaged for most of last year, the country is facing protracted economic pain that its Asian partners appear unwilling or unable to assuage.