On May 8, President Donald Trump announced withdrawal of U.S. from the Iran Nuclear deal and from there on, tensions have increased regarding Iran oil import. US threatened to implement sections on Asian and European companies if they import Iranian oil. And in June, the U.S. administration further notified that it was pushing foreign countries to cut their Iranian oil imports to zero by 4th November 2018.
The announcement sent oil prices soaring and has been volatile ever since. Thus, in a bid to reassure oil price pinch, U.S. negotiated with Saudi Arabia, where the latter agreed to raise daily oil production by 2 million bpd. But in July, the Trump administration decided to soften its earlier demand and instead provided hand of support to those countries reducing imports, as the chances of countries to switch new supplier entirely was looking very less likely. Furthermore, recently President Donald Trump warned America’s trading partners that anyone doing business with Iran will not be doing business with the U.S.
Asia Pacific and Europe together imported around 2.1 million bpd of Iranian oil in 2017, as stated by OPEC. More specifically, China and India are top two Iran oil importers. And the sanctions lobbed by U.S. has had different impact on these countries.
According to reports, after the sanctions, Iran offered free shipping and credit period of 60 days to keep India from boycotting Iran oil. But India, close ally of U.S., are devising plans to cut off oil imports from Iran drastically, and are also planning to import U.S. oil. India began importing U.S. oil since last year, but the volume was low. As per the reports, U.S. are prepared to send more than 15 million barrels of crude oil to India in 2018, compared to 8 million barrels in 2017. Moreover, the exports could increase if China imposes levies on U.S. oil imports as it would lower U.S. oil price.
In June, India’s import of Iranian oil fell by 16% than that of May. But American light crude oil is not a great substitute for heavy high-sulfur Iranian oil, because of which a major shift is underway. Some Indian refiners performed testing of U.S. oil by mixing it with heavier grades, in order to mimic it’s similarity to Iranian oil.
China, on the other hand, is in a completely different situation, as it is expected to continue purchasing Iranian oil. The ongoing open trade war between U.S. and China may take worse turn, as China is threating to impose 25% tariff on U.S. oil. This would make American oil uncompetitive in China, leading to first, reduced price; and second, reduced supply. In both the scenario, India can surely gain the benefits as the tariffs would make American oil even more attractive to them. Meanwhile, China could continue purchasing oil from Iran, further intensifying tension of US/Iran oil and China/U.S. trade war.
Moreover, Europe may even support China’s purchase of Iranian oil in an effort to keep nuclear deal alive. As Iran’s oil will be boycotted by many countries, it may perhaps see China as the savior of their oil demands, and may also offer discounts to Chinese refiners.
Amidst the ongoing tension between the United States and Iran, latest headline of new U.S. milestone in oil production has been spreading like wildfire in the world oil industry. According to The Energy Information Administration, U.S. oil output hit nearly 11 million barrels per day in July. In May and June, US had pumped about 10.8 and 10.9 million bpd respectively.
Even though US still trails in oil production with Russia, who’s output in July was 11.19 million bpd, it has already leapfrogged Saudi Arabia, which pumped around 10.5 million bpd in June, 2018. And according to the forecasts, U.S. oil production could reach 11.8 million by July, 2019, which means that U.S. would be world’s biggest oil producer, ahead of Saudi Arabia and Russia, for the first time since 1970s.
The U.S. led oil production for much of the 20th century, but it was surpassed by Soviet Union and Saudi Arabia in 1974 and 1976 respectively. But, the boom in American oil is direct result of its decade-long investments in unconventional drilling technology, which implies that oil wells now drills weak layers in rock directly releasing more oils and natural gases. However, Saudi Arabia and Russia can reclaim their respective positions by boosting their own productions.
Therefore, with U.S. sanctions on top two oil importers, Iran & Venezuela, and with its oil production already capable enough to surpass than that of Russia, the United States can finally regain its status as ‘top oil producer’ since 1970s. Moreover, increased demand for U.S. oil is a great opportunity for U.S. producers to sell oil to potential countries like India, Turkey, Taiwan and China.
Senior Research Analyst, A2Z Insights
