While Iran and the US are making cautious diplomatic overtures, a return to their lapsed nuclear deal remains a distant prospect. But for global oil markets, a pact is already taking effect.
Months of secret diplomacy between the two nations have yielded progress on prisoner swaps, the unlocking of frozen assets and possibly even Iran’s uranium enrichment. They also appear to have produced an informal agreement on oil flows.
US officials privately acknowledge that they have gradually eased the enforcement of sanctions on Iranian oil sales. Tehran has restored output to the highest level since the ban began five years ago and is sending its most crude to China in a decade. Iranian officials are confident they will bomb even sooner.
The flood of supply is helping moderate oil prices, which fell below $85 a barrel in London this week, offering relief to consumers and central banks after years of rampant inflation. Keeping the cost of gas under control, now near $4 a gallon, may also help President Joe Biden’s 2024 re-election campaign.
“It’s the traditional game of energy diplomacy: cut deals to get extra barrels,” said Helima Croft, head of global commodities strategy at RBC Capital Markets LLC in New York. “The economic interests of the United States and Iran are aligned when it comes to more barrels on the market.”
A State Department spokesman said the United States continues to strictly enforce a robust framework of oil and other sanctions against Iran, noting that export levels fluctuate regularly in response to prices and other factors .
Neither country expects to imminently resurrect the 2015 deal, abandoned by former President Donald Trump, that allowed the Islamic Republic to freely sell oil in exchange for curbs on its nuclear program.
However, in recent weeks they have reached an agreement on a possible prisoner exchange and the transfer of $6 billion in blocked Iranian oil revenues to South Korea, events that the Biden administration insists are unrelated. . There are even reports that Iran significantly curbed its stockpile of near-weapons-enriched uranium.
The temporary easing is trickling down to the oil trade. Washington still won’t tolerate purchases from most of Iran’s pre-sanctions customers, such as South Korea, Japan or European countries, but is relaxed about expanding sales to China.
Shipments to the world’s biggest importer have reached 1.5 million barrels a day, the highest in a decade, market intelligence firm Kpler Ltd. estimated. TankerTrackers.com Inc., another consultant, said exports are above 2 million barrels a day.
Iran’s output rose to 3 million barrels a day in July, the highest level since 2018, according to the International Energy Agency in Paris.
“Biden is willing to look the other way in exchange for Iran limiting these uranium stockpiles,” said Fernando Ferreira, director of geopolitical risk at Washington-based consultancy Rapidan Energy Group. Also, “the White House would be happy to see more barrels on the market to help keep prices under control,” he said.
Tehran hopes to increase output to 3.4 million barrels in the coming weeks, Oil Minister Javad Owji recently told the Iranian parliament’s energy committee, according to the state-run Shana news agency. That could rise to 3.6 million barrels by the end of the year, according to people with direct knowledge of the matter.
If the country reaches that target — a few hundred thousand barrels less than the pre-sanctions capacity of 3.8 million barrels — there won’t be much more oil to flow even if a formal deal with the US is finalized.
“They are approaching pre-Trump levels; there’s a question of how much more they can do,” Croft said. “The question is: At what point does ‘enforcement of de minimis sanctions’ really mean ‘de facto lifting of sanctions?’
The rebound in sales is one of the most tangible signs yet that Iran, reeling economically from years of isolation, is reasserting itself on the global stage after beginning to mend ties with regional rivals and foster relations with the main Asian power.
The supply surge comes at a fragile time for global oil markets, with China’s economic growth and fuel demand faltering, undermining the efforts of Iran’s counterparts in the OPEC+ coalition to strengthen prices.
Saudi Arabia, the leader of the Organization of the Petroleum Exporting Countries, stepped up oil production cuts over the summer by 1 million barrels a day. However, Brent futures have retreated 5% since hitting a six-month high in early August.
For the Saudis, the return of Iran “isn’t a big problem right now, but it has the potential to become one,” said Christof Ruehl, a senior analyst at Columbia University’s Center for Global Energy Policy. .
Whether the Islamic Republic can maintain, or even increase, exports will initially depend on how much more oil it can pull from storage. The country has extracted a combined 16 million barrels ashore and aboard tankers this month, leaving it with another 80 million, according to Kpler.
But with most potential buyers still off limits, Iran will ultimately rely on China’s appetite.
Beijing has been scooping up Iranian barrels to fill its strategic reserves, encouraged by deep discounts offered by Tehran to compete with Russian supplies rejected by Europe. Iran’s two main grades are currently trading at discounts to Brent of more than $10 a barrel, traders say.
But Chinese consumption is under pressure as the country grapples with crises ranging from youth unemployment to turmoil in its shadow banking and real estate sectors. A top oil executive suggests the nation’s fuel use could peak for the year.
“The amount of stockpiling that China has done is going to run out at some point,” said Ed Morse, head of commodities research at Citigroup Inc. “China’s demand growth is about to end.”
Finally, logistical obstacles remain. Restrictions on access to the international banking system make it difficult for Iran to pay, and without foreign investment it will struggle to increase production capacity.
In addition, Tehran, frozen by international shipping and insurance, needs to secure enough “dark fleet” tankers to transport its cargoes.
The ships, often aging and uninsured carriers that disable transponders to avoid detection, are also essential for Russia, which has been shut out of conventional shipping after the invasion of Ukraine.
“Will there be enough tankers to move both?” Rapidan’s Ferreira said.
–With assistance from Patrick Sykes, Arsalan Shahla, Kateryna Kadabashy, Courtney McBride, Sharon Cho, Alaric Nightingale, Serene Cheong, Sarah Chen and Nick Wadhams.
