U.S. Allies Starved of Iran Oil Even Before Trump's Deadline

(Bloomberg) -- Iranian oil shipments to some U.S. allies are being threatened even before America’s Nov. 4 deadline for buyers to curb imports and comply with renewed sanctions on the OPEC member.

September-loading cargoes are set to be the last to head for Japan if the Asian nation doesn’t receive an exemption from the U.S., people with knowledge of the matter said. South Korea, meanwhile, is said to be facing problems with July shipments because of tanker-insurance and chartering issues, with buyers already shunning a form of oil known as condensate from the Persian Gulf state. A Taiwanese refiner is mulling ending purchases.

The risk of disruptions sooner than early November signals how diplomatic allegiances are affecting the oil market after Donald Trump’s decision in May to reimpose restrictions on the Islamic Republic over its nuclear program. Close American allies such as South Korea and Japan are grappling with how to sustain their ties with the U.S. without jeopardizing their energy industry as well as their relationship with long-time crude supplier Iran.

“We are in a knotty situation as we have to listen to the U.S., but at the same time Iran is an important supplier of crude and condensate,” said Kim Jae Kyung, a research fellow at Korea Energy Economics Institute. “It’s the Trump administration that we are dealing with, and that unpredictability is stoking concern among refiners and petrochemical companies in Asia, making them voluntarily cut their shipments from Iran before the deadline.”

U.S. Allies Starved of Iran Oil Even Before Trump's Deadline

Japan, Iran’s third-biggest customer, imported 140,000 barrels a day of oil from the Middle Eastern nation in the first six months of this year, 32 percent more than for 2015, according to data from industry consultant FGE. South Korea, meanwhile, has cut shipments from Iran by 30 percent in the period to 81,000 barrels a day, while Taiwan has boosted purchases to 11,000 barrels daily this year from zero three years ago.

A decision on what to do about imports from Iran by China and India, who together bought about 1.4 million barrels a day of Iranian crude over the past three months, will probably have a larger impact on the broader oil market.

China, which is currently embroiled in a trade dispute with the U.S., hasn’t yet made any public announcement on whether it will fold to America’s demands to halt purchases of Iranian crude. India has so far sent mixed signals. While the South Asian country has said it plans to seek exemptions and is also looking at alternate payment mechanisms, the government’s also asked refiners to brace for all eventualities, including zero imports.

The Trump administration is putting pressure on nations to entirely stop purchases of Iranian supplies, as it targets the economic lifeline of OPEC’s third-largest producer. At the heart of the problem for buyers is a U.S. threat to cut off access to the American banking system for foreign financial institutions that settle trades with the Middle East nation’s central bank.

While it’s “very unlikely” that the U.S. will be successful in curbing Iranian exports to zero, the more aggressive threat of sanctions is expected to force about 800,000 to 1 million barrels a day of the producer’s crude off the market by November, Ehsan Khoman, head of Middle East and North African research at Mitsubishi UFJ Financial Group Inc., said in a July 10 note.

Trump in May announced he was quitting a 2015 nuclear accord between world powers and the Islamic Republic that had called for it to curb its nuclear program in return for the easing of sanctions.

©2018 Bloomberg L.P.