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Markets are Tighten on Iran-US Tensions

Iran is also awaiting European guarantees on the sale of Iranian oil and banking relations.

 

With the first phase of the US sanctions against Iran in place and the next phase not too far off, geopolitics is beginning to take charge of the crude markets. Iran’s oil exports are dropping. Markets are tightening.

The glut of unsold oil floating around in the Atlantic Basin has halved in recent weeks, whereas millions of unsold barrels of crude that had pooled around northwest Europe, the Mediterranean and West Africa over July and August are rapidly draining, leaving Iranian customers looking for alternatives.

Taking the cue, crude markets are rallying.

The ongoing Iranian saga is mainly to be blamed for this. UN nuclear watchdog, International Atomic Energy Agency, reiterated last Thursday that Iran continues to remain within the parameters imposed by the 2015 nuclear deal. But Washington remains adamant. Trump administration has already scrapped the deal - despite the urgings of Washington’s European partners not to do so.

Will the nuclear deal survive Trump’s move? China, Europe and India hold key to the emerging crude matrix. Conflicting signals from Tehran make the scenario still more confusing and indeed interesting.

Sticking to the nuclear accord is not the only way forward for Iran, Foreign Minister Mohammad Javad Zarif subtly threatened. “Being the party to still honour the deal in deeds & not just words is not Iran’s only option,” he said on Twitter.

European leaders are endeavouring to keep the deal intact. Speaking after the IAEA report was sent to the agency’s member states, French Foreign Minister Jean-Yves Le Drian said the deal was still holding, despite the US withdrawal.

He urged his fellow ministers to do more to protect Tehran from US sanctions, calling for “permanent financial mechanisms that allow Iran to continue to trade.” The EU has reportedly implemented a law to shield European companies from the impact of US sanctions on Tehran and has approved aid for the Iranian private sector, although large European companies are pulling out of Iran.

However, only last week, Iranian Supreme Leader Ayatollah Ali Khamenei cast doubt on the ability of EU countries to save the agreement, hinting Tehran might abandon it. Khamenei told President Hassan Rouhani not to rely too much on European support.

This was despite the fact that the EU decided to provide Iran with 18 million euros ($21m) in aid to offset the impact of US sanctions. Zarif, however, welcomed the move. “This is a package that will help both sides have communication with each other and it doesn’t have anything to do with the nuclear agreement and other hype,” the minister said, according to ISNA. However, the top US envoy on Iran, Brian Hook, criticised the EU aid to Tehran and said it sent “the wrong message at the wrong time.”

Iran is also awaiting European guarantees on the sale of Iranian oil and banking relations. “We are still waiting for Europe to take action on the sale of Iranian oil and the preservation of banking channels,” Zarif was quoted as saying.

In the light of all this, the big question is: Can the US pull off its threat of squeezing out Iran completely from oil markets? The campaign has proven effective thus far. In the first half of August, Iran’s oil exports fell by 600,000 barrels per day, plunging from 2.32mbpd to 1.68mbpd. Iran’s exports have been falling all year, and reached their lowest level in four months by July, before taking a real plunge in August.

Some Iranian customers, including South Korea, have suspended imports. China, despite defiant posturing, has scaled back its purchases - somewhat. Yet, Beijing continues to insist, there is no stopping. “Some of our downstream refineries were designed for refining Iranian oil,” Sinopec’s Huang Wensheng insists. The message from Beijing is clear; it would continue buying. The issue, however, is; how much.

Being the second largest importer of the Iranian crude, India is another big question mark. It has reduced its purchases from Iran from 706,452bpd to 203,938bpd during the August 1-16 period. And with Secretary of State Mike Pompeo and Defense Secretary Jim Mattis reaching New Delhi later this week, the pressure to cut further is definitely on. India has been taking a middle-ground. “Definitely we are not going to zero,” a senior Indian official told Reuters. To what extent it can resist the US pressure is still to be seen.

In the midst of all this - one thing is only certain. Iranian crude business will be adversely affected — for sure — but it won’t go to zero, as desired by Washington.

 

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