Two months in office and President Joe Biden has yet to do the one thing many expected of him almost as soon as he got in: reactivate the US nuclear deal with Iran and reverse Trump-era sanctions on Tehran. Even without an agreement, at the very least the expectation was for him to begin talks.
Biden has done neither. But Iran does not appear too perturbed by his procrastination. The Islamic Republic may have shown some impatience at first, even made veiled threats of ramping up its uranium enrichment, to force Washington to the negotiation table.
In recent days though, Tehran has fallen into near radio silence on the matter. Whereas a senior White House official reportedly said a week ago that both sides should find a way to get “back into compliance with the deal.”
Whether such a pact gets done, Iran is slowly getting what it wants out of the Biden administration: non-interference with its production and exporting of oil.
Lip Service To Trump-Era Sanctions
Trump’s near 2-½ year “maximum pain” campaign had almost decimated Iran’s economy, bringing its crude exports from a pre-sanctions high of 2.5 million barrels per day (bpd) in April 2018 to as little as 100,000 bpd at one point. With the former president gone, the Biden administration has been paying lip service more than anything to the sanctions he left behind.
That’s working marvelously for the Persian Gulf nation, which has turned the cat-and-mouse game it used to play with Trump’s sanction enforcers into an open violation of the prohibitions he advocated. Iran now not only exports oil to “loyal” refinery customers in China, but is also looking for other willing buyers of its crude, reportedly offered at discounts of between $3 and $5 per barrel versus the international benchmark Brent.
India may become one of those new buyers of Iranian crude. The third biggest oil importer after China and the United States is looking to cut its purchases from Saudi Arabia by about a quarter from May, after Riyadh refused to raise its production to meet Indian requests for more oil.
Iran’s sanctions-defying audacity comes at a particularly troubling time for oil prices, which fell spectacularly on Tuesday for a second time in four days on demand concerns triggered by a new wave of coronavirus-related restrictions in Europe. Both Brent, and the US crude benchmark, the West Texas Intermediate, settled down 6% after Thursday’s 7% drop, which was the worst in a day for oil since June.
The plunge poses a challenge to the OPEC+ alliance of global oil producers which will be meeting on Mar. 31-Apr. 1 to decide on production cuts and quotas for keeping crude prices supported. The 23-nation OPEC+—made up of the 13-member Saudi-led OPEC, or Organization of the Petroleum Exporting Countries, and 10 non-OPEC countries steered by Russia—is withholding at least 7 million barrels of daily supply from the market.
Those cuts, along with optimism of demand recovery from the COVID-19 pandemic, helped boost US benchmark WTI from under $36 per barrel on Oct. 30 to just under $68 by Mar. 8. Brent rose from below $38 to just above $71 in that same stretch.
Iran Could Mess Up OPEC+ Projections
Iran is a founding member of the original OPEC but is exempted from the cartel’s current production cuts due to the US sanctions. Iranian oil production and exports are also off OPEC’s books.
That means that if Iran is adding a million barrels or more to the market daily, it can mess up OPEC+’s projections for two reasons. The first is that the additional oil shouldn’t even be there. The second is that even if that supply did exist, it should come from one of the 22 members of the alliance participating in its production policy—not a sanctioned member whose output and sales are not even officially accounted for.
Iran, of course, is well aware of all this. Aside from keeping its economy afloat with sales of sanctioned oil, the government of President Hassan Rouhani also takes particular delight in playing dumb at OPEC+ meetings while complicating matters for cartel head Saudi Arabia, which conspired with Trump to wage his “maximum pain” campaign against Tehran.
Said John Kilduff, founding partner at New York-based energy hedge fund Again Capital:
“The Iranians may not have a deal with the US, but they ought to be happy as they’re exporting a heck of a lot more oil now than six months ago. Of course, it’s all to the detriment of OPEC and that makes it particularly sweet to the Mullahs, considering that it’s sort of a payback to the Saudis.”
The Iranians are getting craftier too in evading any potential seizure of their sanctioned oil cargoes by dressing them up as crude originating from elsewhere.
Bloomberg reported that China, for instance, released data this week that showed it imported no Iranian crude for the first time in months, a sign that oil from the Persian Gulf nation was being masked as supply from other countries.
According to Chinese customs data, there were zero crude shipments from Iran during January and February, the first such occurrence since August. However, there was a spike in purchases from Oman and Malaysia—two countries that the Iranians are known to often use in disguising the origin of their oil.
China Seen Ramping Up Iran Oil Purchases In March
Data from ship-tracking companies and traders suggest that Iranian oil flows have expanded exponentially recently and that vessels carrying crude cargoes from the country were using multiple workarounds to disguise their content, aside from switching off transponders during travel to avoid detection.
Energy research company Kpler says its data shows China imported about 478,000 barrels daily from Iran on average in February, and this was expected to increase to about 1 million daily in March—one of the highest monthly purchases on record.
One also has to ask what the risks are for buyers of Iranian oil.
For an idea, China is currently buying close to 1.0 million barrels a day of sanctioned crude, condensate and fuel oil from the Islamic Republic, according to estimates by analysts and traders obtained by Bloomberg. But since Biden came to office, US authorities have seized only one tanker in February believed to be carrying Iranian oil, and even that roughly 2-million-barrel cargo has been disputed as originally from Iraq and belonging to an UAE sheikh.
So, the simple answer is: The risks are little enough to be enticing.
Even so, a senior White House official told the Financial Times last week that Trump-era sanctions could still be enforced against both buyer and seller of Iranian oil.
The official, speaking on conditions of anonymity, said:
“We’ve told the Chinese that we will continue to enforce our sanctions. There will be no tacit green light.”
But in the same breath, the official said the Biden administration’s priority was to recreate the original 2015 nuclear deal involving Iran with the United States, Britain, Russia, France, China and Germany. That pact, sealed during the Obama era when Biden was vice-president, was what Trump tore up in 2018 before imposing sanctions on Iran.
For context, the delay in reaching a new nuclear pact for Iran stems from the Biden administration’s insistence that the Islamic Republic show proof first of having discontinued uranium enrichment and other atomic weapons-making activity. The Rouhani government says it will do those the moment the sanctions are lifted. And so, the game of chicken—and who blinks first—continues between the two.
Biden Would Rather Do A Deal Than Crack Down On Iran
The senior official who spoke to the FT said the White House could relieve sanctions “either as part of a mutual set of steps or as part of a full return into compliance” with the 2015 nuclear accord.
He added:
“Far better than us focusing on sanctions enforcement and China focusing on sanctions evasion would be to get on a more productive course, which is for the US to lift sanctions and Iran to reverse its nuclear steps. We’re not going to make a religion out of the format.”
The simplicity of the path offered by the White House suggested to some that a deal was imminent and that the administration had little desire to devote either time or resource in holding out, despite its feet-dragging so far.
Said Tariq Zahir, crude trader at Tyche Capital, a macro fund in New York:
“Biden’s just got a $1.9 trillion COVID stimulus out and his next target is possibly a multi-trillion dollar infrastructure bill. On top of these, he has a big immigration problem threatening to explode at the Southern (NYSE:SO) border. He barely has time or nor interest in enforcing sanctions on Iran.”
Disclaimer: Barani Krishnan uses a range of views outside his own to bring diversity to his analysis of any market. For neutrality, he sometimes presents contrarian views and market variables. He does not hold a position in the commodities and securities he writes about.