Previously, we reported that Iran’s oil exports have seen a strong rebound under the Biden administration with the U.S. and its allies hoping to strike a new nuclear deal with Tehran after the Trump administration scuttled the Joint Comprehensive Plan of Action (JCPOA) deal of 2015. Under former President Donald Trump, Iranian oil production tumbled from 3.8 million barrels per day in early 2018 to less than 2 mb/d in late 2020; in contrast, production has surged under Biden to 3.2 mb/d. China is Iran’s biggest customer, with Iranian crude accounting for 13% of its imports. However, China is likely to see its gravy train toppled after Trump returns to the White House for a second term.
Back in July, Trump promised in his Republican National Convention speech to reduce Iranian oil exports. He said he had previously achieved this objective by linking it to trade; “I told China and other countries, if you buy from Iran, we will not let you do any business in this country and we will put tariffs on every product you do send in of 100% or more.” According to StanChart, Iranian oil is likely to play a key role in Trump’s wider China trade policy agenda.
"A Trump victory may see the United States enforce sanctions against Iran, thereby reducing Iranian oil exports and prompting oil prices higher," Vivek Dhar, a commodities strategist at Commonwealth Bank of Australia, said in a note.
China has been importing Iranian oil indirectly via proxies. According to StanChart, crude oil imports from Malaysia clocked in at 1.456 million barrels per day (mb/d) in June, the second-highest monthly average on record. The commodity experts pointed out that Malaysia’s crude oil output is about 0.35 mb/d while exports usually average 0.2 mb/d, implying that the vast majority of the oil that China imports from Malaysia was not produced in the country. According to multiple media sources, the transfers involve a dark fleet consisting of a group of aging tankers that rarely have an identifiable insurer. These transfers can be hazardous, including the danger of spills and collisions, with so many low-quality tankers massed in a narrow trade route with their transponders off. For instance, two such vessels caught fire off Singapore after a collision in July.
Iran’s oil exports have started shrinking after a ramp-up in sanctions by the Biden administration froze some ships that deliver Iranian oil to China via ship-to-ship oil transfers off Malaysia and Singapore. China's imports of Iranian crude oil and condensate dropped by 524,000 barrels per day (bpd) to a four-month low of 1.31 million bpd in November as the sanctions took effect. This has triggered a spike in the price of Iranian crude: Discounts for Iranian Light crude against ICE Brent have narrowed to about $2.50 per barrel, versus discounts of $4 in early November. Discounts for Iranian Heavy crude have also narrowed to around $4-$5 a barrel from about $7 in early November.
"Tougher U.S. sanctions on tankers involved in Iranian oil flows have tightened shipping capacity," Xu Muyu, a senior analyst at Kpler, wrote in a report.
That said, the incoming Trump administration will have its work cut out for it trying to stop the flow of Iranian oil to China. Back in 2019, China's teapot refiners stepped in as buyers of discounted Iranian crude, filling a vacuum left by its state oil firms wary of U.S. sanctions. This helped the country save billions of dollars, and cemented China's status as Tehran's top oil market. China and Iran have built a remarkable trading system that mostly uses Chinese yuan and a network of middlemen, helping the two allies to avoid the dollar and exposure to U.S. regulators. At the same time, Washington has often been reluctant to take steps that would remove supply from the global market in the wake of the Ukraine war, not to mention that severely limiting Iranian oil exports would likely hamper Trump’s ambitions to lower America’s fuel prices.
India To Drive Oil Demand Growth
India is likely to become the most important driver of oil demand growth in the coming years, taking the mantle from China. India’s oil demand growth is expected to exceed China’s for the first time in 2024, and continue in 2025. According to Kang Wu, global head of macro and oil demand research at SPGCI, India’s oil demand in the current year grew by 180,000 barrels per day, surpassing China’s growth at 148,000 bpd. India’s oil demand is expected to increase by 3.2% Y/Y in 2025 compared to a 1.7% clip by China.
“China’s role as a global oil demand growth engine is fading fast,’’ Emma Richards, senior analyst at London-based Fitch Solutions Ltd, told The Times of India. According to the analyst, over the next decade, China’s share of emerging market oil demand growth will decline from nearly 50% to just 15% while India’s share will double to 24%.
But it’s not just a dramatic slowdown in its economy that will make China a less important player in global oil markets. The country’s booming EV sector will rapidly lower oil demand much faster than India’s: China sold 6.1 million EVs in 2022 compared with just 48,000 sold in India. India is nowhere near as aggressive with its clean energy push compared to China. Last year, India’s coal minister declared that the country has no intention of ditching coal from its energy mix any time soon. Minister Pralhad Joshi said that coal will continue to play an important role in India until at least 2040, referring to the fuel as an affordable source of energy for which demand has yet to peak in India.
By Alex Kimani for Oilprice.com
