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Crude Clash: US sanctions vs. Chinese indifference, Iranian oil

iran china vs us

With new oil sanctions against Iran set to be introduced in November, the United States and China, the No. 1 importer of Iranian oil, are gearing up for a clash over crude.

While the US is seeking to bring Iran’s oil exports to zero, roughly one-quarter of Iran’s crude is exported to China, which will most likely reject any attempts by Washington to curb its oil imports from Iran. “I don’t expect China to acquiesce to Washington’s demands, given the worsening relations between the two nations,” oil analyst Stephen Brennock stated, according to Barron’s magazine.

European countries are largely against Trump’s unilateral decision, but their oil trade is dominated by private companies that deal in US currency and need to worry about their interests in the US. On the other hand, China’s situation is mostly different, giving it the ability to bypass the US sanctions. China has the ability to pay in its own currency rather than US dollars, as it established “petro-yuan” contracts in early 2018.

The communist regime will likely reduce imports from its large, state-owned companies like Sinopec, but China also has many smaller refiners who would remain unexposed. “They have tons of mid-tier and smaller refiners who are not directly exposed to the US,” said Peter Harrell, a former State Department official under former US President Barak Obama and a fellow at the Center for a New American Security.

“Our base case is that the two sides avoid a major confrontation over Iran sanctions, but it will be a potential source of conflict,” said Michael Hirson, who covers China for the Eurasia Group.

The Trump administration is seeking greater oil supply from Saudi Arabia and other Middle Eastern producers to replace Iran’s, but analysts are not certain Riyadh will comply quickly.

“OPEC doesn’t want to add 1.5 million barrels and maybe push the market back to surplus for 2019,” said Edward Bell, a lead commodity analyst for Emirates NBD in Dubai. “And now there’s some face to be saved, not to be seen doing a favor to the US.”

In May, Trump removed the US from the Iran nuclear deal signed under his predecessor, Barak Obama, and a new set of sanctions is set to be introduced on November 4. Trump seeks to use the sanctions to force Iran to end its nuclear ambitions and its support of terrorism across the region.

With oil sanctions introduced by the Trump administration in August, Iran's oil exports have decreased by roughly 35 percent since April, and with a new set of sanctions set to be introduced in November, the decrease is expected to become even more dramatic.

The drop in oil exports is seriously affecting Iran's economy, as 80 percent of the country's tax revenue comes from oil, according to the IMF.

 

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