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Mounting sanctions squeeze Iranian exports

The country’s oil sector and economy will continue to feel the suffocating effects of US sanctions

In November 2018, the US withdrew from the landmark Iranian nuclear accord and re-imposed economic sanctions. Since April, the US government has aimed to reduce Iranian oil exports to close to zero, ending sanction waivers that were previously given to China, India, Japan, South Korea and Turkey. As a result, exports to Iran’s top four buyers have dropped significantly.

The exact level of Iran’s oil exports has become increasingly opaque. Iranian oil tankers have been conducting tanker-to-tanker oil transfers and turning off their navigation systems to continue sanctions-busting shipments. The country’s oil revenue, while squeezed, is most likely above the officially recorded level. 

Government-reported exports of crude and condensate in September were c.400,000bl/d, down from 1.95mn bl/d in the same month of 2018, according to information provider S&P Global Platts. But another source, cargo tracking firm Kpler, sees export volumes for August at considerably lower levels—at just 160,000bl/d, down from 365,000bl/d in July and 2mn bl/d in August 2018. Whatever the exact levels, it is nonetheless clear that US sanctions have significantly lowered Iranian crude exports. 

Banking on products 

Petroleum products’ sales have remained more buoyant, generating nearly half-a-billion dollars in export income for the government each month, according to information firm Thomson Reuters. China has been the main buyer of Iran’s LPG, with significant Chinese feedstock appetite following its petrochemicals capacity buildout in recent years. Iran’s LPG export volumes were thought to be c.200,000bl/d in July, while the country’s total LPG and fuel oil export revenue is estimated at approximately half-a-million dollar per day. 

The government has also launched new initiatives to try to offset the US sanctions. Refined products are auctioned domestically at Tehran’s stock and commodity exchange—low-octane gasoline is then exported by land to Afghanistan while higher quality fuel is exported to Iraq. Income from each of these weekly sales is estimated to average c.$200mn (on volumes equivalent to 600,000bl/d).

Buyer squeeze

China and India had been the two largest buyers of seaborne Iranian crude. But the risk of breaching US sanctions has prompted both countries to cut down on imports. Even during the 2012-15 sanctions, China imported between 400,000-500,000bl/d. In October 2019, imports were estimated at just 300,000bl/d.

China hopes to use US antipathy to Iran as a bargaining chip both to push Iran into discounts in return for it flouting US sanctions and buying Iranian crude; and with the US to seek concessions on other issues in return for complying more rigidly with the restrictions—aided in its double game by the opacity of exactly how many Iranian barrels are going where. China’s, at least official, import reduction and Chinese energy firms suspending investment projects in Iran’s energy sector are definite conciliatory nods towards Washington, although it is unclear if Beijing is just trying to build credit or has received anything tangible in return from the Trump administration.  

China hopes to use US antipathy to Iran as a bargaining chip

The US government has lobbied hard to convince India’s policy makers to seek substitutes for Iranian crude— previously the country’s third largest supplier after Saudi Arabia and Iraq. The US role in supplying India with crude has risen significantly. The country imported on average c.184,000bl/d from the US between November 2018 and May 2019—a material increase from c.40,000bl/d during the same period 12 months earlier.

Prospects ahead

Without any breakthrough in Washington-Tehran relations, Iran’s oil export outlook is expected to remain at current low levels, with a further constriction more likely than a rebound. And, given that the US has been squeezing Iran further by extending restrictions to more Iranian individuals and entities, 2020 looks set to be a difficult year for the Iranian economy. Negative growth, high inflation, rising unemployment and increasing budget deficit look likely challenges.

While the Iranian government has previously attempted to reduce its budgetary reliance on oil income, it has never succeeded. Thus, another year of oil revenue decline will inevitably have a negative impact on government expenditure. Investment in infrastructure projects is expected to drop below the average level across the last two decades. Cutting cash handouts from the subsidy reform programme, selling government bonds and increasing tax income are amongst the government policies to try to address the budget deficit issue.

The Tehran regime will therefore have one eye on potential domestic discontent, while also likely feeling that its ability to play havoc in the Gulf region and threaten the security of global energy market trade flows is perhaps its best card to improve its beleaguered geopolitical standing. Iranian mischief-making abroad—among proven and alleged charges such as downing a US drone, vessel seizures, tanker attacks and strikes on Saudi Aramco’s oil facilities—should be expected to continue.

The key question is whether the status quo can hold. The pinch on Tehran’s finances seems highly unlikely to lead to regime change, given the dearth of credible political opposition at home and outside Iran. But a declining domestic situation will both unsettle the regime and strengthen its hawks. The risk of those tensions driving Iran into a ‘spectacular’ to try to break out of the stalemate and, in its aftermath, re-order more in its favour the current geopolitical picture—both in the Gulf and more widely—cannot be dismissed.

Even if Iran does not take drastic measures, relatively measured responses by its neighbours, the US and other international actors to Iran’s low-level provocations thus far cannot be guaranteed to continue. A more aggressive reaction and subsequent escalation is credible. The game will continue, the stakes remain perilously high.     

Sara Bazoobandi is a non-resident senior fellow at the Atlantic Council and managing director of Middle East Risk Consulting

Keep up-to-date with how the predictions in Outlook 2020 are playing out and get a first look at the themes that will shape Outlook 2021, as well as with relevant events such as the Outlook launch party and publishing schedules, by subscribing to Petroleum Economist’s bi-monthly Outlook newsletter.

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