Defiant China to soften blow of Trump's Iran oil decision

Oil prices surged to a nearly six-month high after the US government said it would not extend sanctions exemptions to countries importing oil from Iran when they expire in early May.

Eight governments — India, China, Turkey, Greece, Italy, Japan, South Korea and Taiwan — had been given six months to wean themselves off Iranian oil. Greece, Italy and Taiwan are believed to have eliminated imports from Iran. 

China and Turkey have objected to unilateral US sanctions on Iranian oil exports, warning that it could disturb regional stability.

Defiant China

The Trump administration's move to stifle Iran of much-needed oil revenue is expected to hurt Chinese oil companies, which are among Iran's biggest companies. Iran is China's seventh-largest crude oil supplier, accounting for nearly 6% of oil imports last year.

Beijing has protested against the renewed sanctions, saying they "will contribute to volatility in the Middle East and in the international energy market."

"Most people expect that China will continue to import Iranian oil and might even increase imports. They have to make a stand here," SEB commodities strategist Bjarne Schieldrop told Reuters news agency.

China's defiance is likely to complicate matters at a time Beijing and Washington are in discussions to ease trade tensions.

"Iran sanctions are going to be a big challenge for the US-Chinese relationship," Jason Bordoff, the director of Columbia University's Center on Global Energy Policy and a former energy adviser to President Barack Obama, told the New York Times.

Bordoff said if Chinese imports do not drop quickly, the US sanctions could be applied to Beijing's central bank, the People's Bank of China.

'Limited' impact on oil prices

International oil prices surged about 3% to top $74 (€66.1) a barrel — a nearly six-month high — immediately after the US decision, underscoring uncertainty over oil supplies.

The oil prices have already climbed more than $20 a barrel this year due to a tightened oil supply resulting from the loss of oil from Iran and Venezuela, which has also been slapped with US sanctions. Output cuts by OPEC members and other major oil producers led by Russia have also kept oil prices in check.

The recent outbreak of violence in Libya also threatens to disrupt supply and has been weighing on oil prices.

But experts say the latest US decision will have a limited impact on oil prices.

"Medium-term price implications will probably be limited, because China and India will likely continue importing small amounts of Iranian crude oil, and there is more than enough spare capacity to cover the loss of Iranian barrels," Henry Rome, an analyst at consultancy Eurasia Group, wrote in a research note.

"But volatility will remain high and an aggressive Iranian response, such as a cyberattack against Saudi oil infrastructure, could also affect prices," he said.

Key role for Saudi Arabia

The Trump administration has said that it was working with its allies Saudi Arabia and the United Arab Emirates to bridge any gap in supplies. Riyadh has so far refused to commit to increasing oil output.

Saudi Energy Minister Khalid al-Falih said on Monday that Saudi Arabia would "coordinate with fellow oil producers to ensure adequate supplies are available to consumers while ensuring the global oil market does not go out of balance."

Saudi Arabia, the world's top oil exporter, has supported President Donald Trump's decision to end waivers not only because Iran is its main foe, but also because a rise in oil prices means higher revenue for the kingdom.

Officials in Riyadh were disappointed after Washington exempted major Iranian oil importers from sanctions in November, causing oil prices to plunge to around $50 a barrel from more than $85. They had expected a tougher stance from the Trump administration and had increased their own production to bridge the gap resulting from Iranian oil going off the market.

The New York Times reported on Sunday that Middle Eastern oil executives are doubtful Riyadh will immediately decide to pump more oil, in part because of Washington's November decision to give sanction exemptions.

The Russia factor

Saudi Arabia has been cooperating with Russia in recent years to manage global oil supplies. But earlier this month, Moscow, which has struggled to comply with a pact with OPEC countries to cut their combined oil output, signaled that it wanted to instead raise oil output to take advantage of recent spike in oil prices.

Russia stands to benefit from Washington's decision on Iranian oil as it would mean raising output to bridge the shortfall and keep oil prices from spiraling. Russian President Vladimir Putin has said existing oil prices suited Russia, which relies heavily on sales of oil and natural gas.

But should Russia refuse to oblige the US and keep its oil output at current levels, oil prices could go through the roof and hurt an already fragile global economy.

Isolating Iran

US Secretary of State Mike Pompeo said Monday that the latest decision "intended to bring Iran's oil exports to zero."

Oil is the lifeline of the Middle Eastern country, which continues to export one million barrels per day. (bpd). It exported 2.7 million bpd before the sanctions kicked in last year.

Pompeo said so far, the sanctions had deprived the regime of more than $10 billion in oil sales.

"Iranian exports will not actually reach zero," Rome said. China will continue buying Iranian crude, perhaps as high as several hundred thousand bpd, to save face. China may barter for the oil or wall off banks to handle transactions in renminbi. India will likely take a similar position."

While sanctions have crippled the Iranian economy and have led to shortage of food and medicines, they have not really forced Tehran to give up its military role in the Syrian conflict or end support for militias in the region.

Iran has repeatedly threatened to disrupt the flow of oil through the Strait of Hormuz if it's prevented from using the Persian Gulf strait through which about a third of all oil traded at sea passes. Such a move could threaten Saudi exports as the route is used for most oil shipments from the kingdom.