The business of oil may get a bit complicated once Iran re-starts its oil and gas exports. Under the agreement, the United States will not request current buyers of Iranian oil to reduce Iranian crude imports in the next six months in order to qualify for a waiver on sanctions against financial institutions in those countries doing business with Iran.
The interim Iran deal is expected to open the “space and time” – as US officials have put it – for the two sides to build confidence to agree on a longer-term deal. In the meantime, Iran will scale back its nuclear programme in return for limited sanctions relief by focusing on its current oil buyers, and Asia in particular.
Enabling Iran’s oil buyers to purchase their current average amounts of crude oil may tempt some consumer nations to increase their imports, as these economies will face less pressure from the US. The key question will be whether the actions on either side will be interpreted within the spirit and meaning of the agreement in the next six months, or whether hardliners will spoil the cautious rapprochement between Iran and the West.
More for Asia?
There are two key points in the agreement that may create a window of opportunity for Iran to feel safe to export more oil to its current customers, and its Asian customers in particular. First, the US will not demand that current importers of Iranian oil such as China, India, and Japan make further cuts in Iranian crude purchases over the next six months.
Second, the EU plans to allow current buyers of Iranian crude to obtain EU-linked insurance. Due to a lack of access to European Protection and Indemnity (P&I) clubs under the sanctions regime, India, Japan, and South Korea had to introduce sovereign insurance schemes for tankers carrying Iranian crude to their respective shores.
The six-month Iran agreement is the first step to improve Tehran’s relations with the West, and the US in particular, over the short to medium term. However, the coming months will tell whether Iran not only continues its current exports but also increases its oil exports slightly. Selling more oil is not only a demand of the Iranian government to allow its return to the oil markets but could also be a potential ad-hoc demand from current consumers of Iranian oil.
Turkey has already announced that it is seeking to buy more oil in the coming months. Other economies such as India, Japan, and South Korea have indicated that they will continue purchasing Iranian oil at current levels but may use spot purchases or include option clauses to increase their oil imports in the medium term if sanctions ease further after the six-month interim period.
Whether the Asian economies buy more oil within the next six months or not, the effect of the current agreement is that Iranian oil will be more readily available to buyers in Asia, as European insurers will be allowed to insure oil shipments from Iran again.
Outlook and implications
While no new sanctions will be imposed on Iran in the next six months, hardliners in the US and Iran could spoil the cautious steps that the representatives of Iran and P5+1 have made.
Furthermore, the key sanctions will remain in place with companies from the EU, which had previously imported a combined total of around 500,000 b/d of Iranian crude, still banned from buying, trading, or transporting the country’s oil. Nonetheless, Asian economies may increase oil imports slightly depending on the signals that come out of the follow-up negotiations in the coming months.
Nevertheless, the Iran deal is politically highly symbolic as it has brought the US and Iran together to agree on a deal for the first time since the Islamic Revolution in 1979. In fact, it is remarkable that within three months, two major regional developments in the Middle East were solved diplomatically rather than militarily. Before the recent Iran deal, a US-Russian effort earlier this summer put sufficient pressure on Syria to destroy its chemical weapons stockpile under international observers.
It is increasingly unlikely therefore that Israel, which is unhappy over the Iran deal and the US’ more conciliatory approach towards Iran, would conduct any military operation against Iran’s nuclear program during the next year when Iran and the P5+1 countries will be working on a comprehensive agreement.
The author is energy analyst at Colorado-based data and research firm IHS.