Since the U.S. sanctions snapped back on Iran’s oil industry, relations between Iran and Iraq have grown more complex and controversial as a series of security and political events in the two countries have captured global attention. Yet while the political aspect of the Iran-Iraq relationship has been dominating coverage of the countries, their ongoing competition in the oil market has not—and once American sanctions are removed, Iran will be returning to a very different oil market.
Sanctions and an Opportunity for Iraq
The return of U.S. sanctions in 2018 was an opportunity for Tehran’s oil rivals, among them Iraq, to fill the gap left by Iranian crude oil—especially in the highly prized Asian market as Iranian exports began to fall. When the U.S. ended the sanctions waivers in May 2019 to import Iranian oil, Tehran’s crude and condensate exports plummeted to below 1 million barrels per day (Mbd), compared to 2.57 Mbd the same month in 2018, according to TankerTrackers.com, an independent firm that tracks crude oil shipment and storage using various tools, including satellite imagery and AIS signal.
In September, and despite U.S. sanctions, Iranian oil exports rose to above 1 million bpd for the first time since April 2019
However, Iran has continued to export crude and condensate clandestinely to conceal the loading and destination of its cargoes. In September, and despite U.S. sanctions, Iranian oil exports rose to above 1 million bpd for the first time since April 2019, according to TankerTrackers.com (see chart below).
Iran and the Slow Reintegration into the Market
The incoming administration of President-elect Joe Biden has expressed its interest in rejoining the nuclear deal, although this won’t be an easy task due to internal politics in both Washington and Tehran. According to Homayoun Falakshahi, a senior analyst at data intelligence firm Kpler, it will be difficult for President-elect Biden “to act too quickly on Iran sanctions, especially due to internal politics, and because he does not want to see this leading to a flood of crude in the oil market.” In addition, the hardliners in Iran, according to Falakshahi “do not want any breakthrough until the [presidential] elections are over next summer.”
Iran’s return to the oil market will not be immediate, although some clients such as India, which used to be Tehran’s biggest customer after China, want to resume Iranian oil imports. Iran has around 100 million barrels of oil in storage, and these include volumes in onshore storage in Iran and China, according to Falakshahi.
Oil rivals, such as Iraq, have increased their market shares in Asia during U.S. sanctions on Tehran’s oil industry
Although it remains unclear how Iran will reposition itself in the global market after the Trump administration leaves the White House, one thing is clear: Oil rivals, such as Iraq, have increased their market shares in Asia during U.S. sanctions on Tehran’s oil industry, particularly in India and China, Asia’s biggest oil consumers. These have been key clients to both Iraq and Iran.
Flow of Iraq and Iran crude oil to Asia since 2018
Iran’s crude oil exports to India halted in May 2019, the month Washington ended its sanctions waivers to eight countries to continue importing oil from Tehran. Even before the waivers came to an end, Iran’s crude exports to India were dropping. During the first four months of 2019, exports averaged 280,000 barrels per day (bpd), compared to 542,000 bpd during the same period in 2018, according to Kpler’s data.
Meanwhile, Iraq’s exports to India were a different story. During the first four months of 2019, Iraq’s Basrah exports to India averaged 892,000 bpd, compared to 758,000 bpd during the same period in 2018, Kpler’s data shows. Overall, Iraq’s exports to India have seen significant changes since 2017 when Iraq became the top seller of crude to India. Throughout 2018 and 2019, Iraq was able to maintain its rank as the top seller followed by Saudi Arabia. Exports to India jumped from an average of 815,000 bpd in 2018 to over 1 Mbd in 2019, according to Kpler.
Turning to China, it has not stopped importing Iranian oil since Washington reinstated its sanctions on Tehran. However, it slashed its purchases, and has been receiving volumes clandestinely, including via Ship-to-Ship transfers (STS), making it difficult to track oil imports from Iran on a monthly basis.
As Iran’s exports began to drop under U.S. sanctions, Iraq’s exports to China climbed to above 1 million bpd in May 2019
As Iran’s exports began to drop under U.S. sanctions, Iraq’s exports to China climbed to above 1 million bpd in May 2019, the month during which US sanctions waivers ended, and they remained at this level until at least August that year (see chart below). As Iraq’s exports rose, Iran’s declined in August 2019 to their lowest level since 2015 hitting the bottom at 72,000 bpd, compared to 591,000 bpd during the same month in 2018, Kpler’s data shows.
Iran will be faced with a market that has been battered by COVID-19, leading the OPEC+ group to perform a balancing act by cutting production.
Challenges: Iran’s Return to a Market with New Dynamics
Once Iran returns as a sanctions-free oil exporter, it will be faced with a market that has been battered by COVID-19 leading the OPEC+ group to perform a balancing act by cutting production. Rival producers and exporters, such as Iraq, have also been vying for more Asian customers. For instance, Iraq’s State Organization for Marketing of Oil (SOMO) has recently proposed a crude oil prepayment deal as Baghdad seeks to generate more revenues amid low oil sales (see chart below). On December 8, Argus Media reported that SOMO had “awarded a five-year term crude supply tender that includes a $2bn prepayment period to China’s Zhenhua.” Around 70 percent of Basrah crude exports head to Asia, with India and China being the top importers.
Moreover, and starting next year, Iraq will introduce a new crude grade, the Basrah Medium (API 29-30), which will be added to the two other exported grades, Basrah Light (API 33) and Basrah Heavy (API 23.6). Speaking to the press on the sidelines of the Iraq Oil & Gas Show in Baghdad on Dec 6, Iraqi oil minister Ihsan Abduljabbar Ismaael said that Basrah Medium will be introduced in January. “During this period, Iraqi crude oils will achieve prices not seen in the past 50 years” as they compete with other grades, the minister said. Among the crude grades that are similar in API quality to Basrah Medium is Iranian Heavy (API 30).
The introduction of Basrah Medium comes at a time when heavy oil demand in Asia is growing, noted Falakshahi. “And this is while competition from other regions like Colombia, Mexico are in decline and Venezuela obviously.” In the short term, Falakshahi added, heavy oil “is more suitable to refineries as jet fuel demand is thrashed.”
Iran’s rivals moved in to fill the vacuum left by Iranian barrels.
The U.S. sanctions pushed Iranian crude oil out of its major markets like India, and caused them to diminish in others, like China. This led to a reconfiguration of shares in these two markets, as Iran’s rivals moved in to fill the vacuum left by Iranian barrels. Now that Tehran is preparing itself for a gradual return to a market where it can export oil freely, its rivals, such as Iraq, cannot ignore the fact that it has not forgotten its pre-sanctions market.
“We will produce and sell 2.3 million [bpd] of oil in (the Iranian calendar year which begins on March 21, 2021),” local media quoted Iranian president Hassan Rouhani as saying on December 9.
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