As Iran remains defiant in the face of U.S. sanctions, India and China, the worlds second and third largest oil buyers, are contemplating a potential move which could counter the U.S.’ pull on global oil markets.
Oil markets scramble as U.S. ends sanction waivers for Iranian oil
Oil prices soared to their highest level since November last week after Washington announced that all waivers for Iranian oil would end on May 1st, pressuring importers to stop buying from Tehran and adding to the tightening of global supply.
Iran has lost billions of dollars in income because of U.S. sanctions, with about 1.5 million barrels each day (bpd) or more of Iranian crude being cut from international markets.
The decision sparked objections in Tehran, with Supreme Leader Ayatollah Ali Khamenei stating the elimination of the waivers was a “hostile measure” which “won’t be left without a response.”
China, India, and Turkey are amongst Iran’s biggest customers that were given waivers from U.S. sanctions to allow them time to search for alternative suppliers. And now the three countries are stuck in limbo, scrambling for new exporters.
$ 1 billion in Iranian unrefined stranded in Chinese ports
Ahead of sanctions last November, Iran sent an enormous shipment of petroleum to China.
The oil is still being held in a so-called bonded tank at the Dalian port, which indicates that it has yet to clear Chinese customs. Regardless of a six-month waiver to the start of May that permitted China to continue some Iranian imports, delivering information shows little of this oil has actually been moved.
Many traders and refineries have refused to touch the cargo over fears of prospective retaliation from the United States.
Tilak Doshi of oil and gas consultancy Muse, Stancil & Co in Singapore explained, “No responsible Chinese company with any international exposure will have anything to do with Iran oil unless they are specifically told by the Chinese government to do so.”
India, China might form a ‘buyer’s bloc’
In an especially noteworthy move, India and China have reportedly decided to form a joint energy coalition. The development is being viewed as the first institutional step towards setting up a buyers’ bloc for cumulative bargaining for oil products. India and China are the world’s second and third largest crude purchasers, with huge potential to move oil markets.
India’s Petroleum Ministry noted in a tweet:
With oil producers' cartel OPEC playing havoc with prices,India discussed with China the possibility of forming an 'oil buyers club' that can negotiate better terms with sellers as well as getting more US crude oil to cut dominance of the oil block.https://t.co/5Nch6hzDDT
— Ministry of Petroleum and Natural Gas (@PetroleumMin) June 14, 2018
Jin Lei, an associate professor at the China University of Petroleum, explained that the chances of China and India forming a buyers’ bloc was high.
Lei described, “OPEC was born out of a time of crisis. Something could be born out of the current situation,” adding, “but the founding parties will need to solve issues such as the positioning of such a bloc and how can it play an effective role to intervene in global crude oil pricing.”
For China, India and any other participating countries to develop an oil buyers’ cartel, such a step would require a functional, centralized payment method and an adequate futures trading platform.