Iran's oil trade faces growing challenges Amid Rising US Sanctions Pressure

In its recent analysis, The Economist unveils that the growing tensions surrounding Iran's oil exports and the escalating sanctions imposed by the US are raising alarms about the potential ripple effects on global energy markets. 

On November 25, the tanker Elva, registered in São Tomé and Príncipe, secretly loaded 2 million barrels of Iranian crude oil off Malaysia's coast. While the typical journey from Malaysia to northeast China takes just two weeks, the Elva’s trip was far from usual. On December 3, the United States blacklisted the ship for violating sanctions, threatening penalties against anyone engaging with it. Now, six weeks later, the ship remains stuck less than 20 kilometers from its loading point.

The Elva is not alone in its predicament. Since October, when the Biden administration intensified its crackdown on Iran-linked tankers, China's crude imports from Iran, which accounts for nearly all of Iran's oil exports, have dropped by a quarter, to 1.3 million barrels per day. Meanwhile, Iranian oil loadings have continued as exporters remain hopeful for a shift in conditions. As a result, the amount of Iranian oil stranded at sea has ballooned to 20 million barrels, with much of it off Malaysia and Singapore.

In the final days of the Biden administration, the US has also targeted Russia. On January 10, US officials imposed new sanctions on 143 tankers, representing 42 per cent of Russia's seaborne oil exports from last year, along with major exporters and insurers. While this move will cause short-term challenges for Vladimir Putin, it is Iran that faces the larger threat. Former President Donald Trump, while uncertain about blockading Russia, has shown clear determination to cripple Iran's financial systems, which could have a significant impact on global energy markets.

For much of his presidency, Joe Biden largely ignored Iran's growing oil trade. From 2018, when the first Trump administration reinstated tough sanctions, to last year, Iran’s crude exports surged twelvefold, reaching 1.8 million barrels per day. However, in October, Biden shifted his strategy. Since then, the US Treasury has blacklisted 55 additional tankers linked to Iran, representing a third of the "dark" fleet used to transport Iranian crude, according to Homayoun Falakshahi of the data firm Kpler.

Insiders say the administration has come to realize that its lenient approach towards Iran has been ineffective. Rather than sanctions, Iran has been undermined by Israel’s successes against Hamas and Hezbollah, the downfall of Bashar al-Assad in Syria, and its nearing capability to produce a nuclear weapon. Meanwhile, with global oil supplies ample and demand weak, it’s less likely that sanction enforcement will significantly affect American consumers. Rising fuel costs will likely be a challenge for the next administration, not Biden's.

The Biden administration is strategically utilizing sanctions. Most of Iran’s oil is purchased by small, unsophisticated refiners in China’s northeast, known as "teapots," which rely on cheap crude to stay profitable. These refiners sell their products locally in Chinese currency, making them immune to "secondary" sanctions that bar US companies from engaging with entities that knowingly buy Iranian oil. However, these refiners still depend on Iran-linked tankers to dock in Chinese ports, and many of those tankers also carry goods to the US.

Sanctions enforcers have recognized the need to target tankers involved in the final leg of transporting Iranian oil, typically from Malaysia to China. In response to the threat of punishment, Chinese ports have started rejecting these tankers. On January 6th, Shandong Port Group, which operates several ports, including those in Qingdao, Rizhao, and Yantai, implemented a ban on tankers blacklisted by the US. As Iranian crude supply has dwindled, its price has risen, trading at a $1.50 discount to Brent (the global benchmark), compared to $6.50 three months ago. This price increase has forced some smaller Chinese refiners, or "teapots," out of the market, reducing their demand for Iranian oil.

Iran is making efforts to replace blacklisted tankers with "clean" ones, a strategy it has used before. However, the global dark fleet, which now handles much of Russia’s oil exports, has expanded so much that there may not be enough ships available, especially as Russia also requires replacement vessels after US sanctions. Meanwhile, China's teapots are already under pressure due to competition from newer, larger refineries and limited import quotas imposed by the government, which is concerned about pollution.

By Naila Huseynova