The world’s top oil buyers are discovering that U.S. sanctions on Iran will squeeze their trade flows whether they agree with America or not.
It was only about three months ago that India’s foreign minister said that the country won’t adhere to unilateral restrictions and will continue buying Iranian crude. China also made similar comments and was said to have rejected an American request to cut imports. Japan and South Korea have held talks with the U.S. aimed at securing exemption
Yet for all the pushback and negotiations, an emerging pattern shows U.S. sanctions are succeeding in throttling Iran’s sales to its customers even before the measures take effect in early November. While America initially wanted a complete halt in purchases, traders are now concerned that even a revised aim for only cuts would take out enough supply to create a market deficit — which other producers may struggle to fill.
“All of Iran’s oil customers are affected by increasing U.S. pressure to halt purchases, even as they request for concessions to cope with the consequences,” said Den Syahril, a senior analyst at industry consultant FGE. “We expect India and especially China to maintain some degree of imports, while buyers in Japan and Korea who’ve cut imports considerably will continue to aggressively seek waivers up till the last minute.”
Near-term futures for Brent crude, the benchmark for more than half the world’s oil, are trading higher than later contracts in a market structure known as backwardation that typically signals a supply squeeze. Front-month prices have soared almost 50 per cent over the past year.
“There’s been a significant bump in the prompt oil contract that’s contributed to the backwardation, and this bullishness is backed by factors such as U.S. sanctions on Iran,” said Stephen Innes, head of Asia Pacific trading at Oanda Corp. in Singapore. The market will look to other producers such as Russia to fill the void, even as Nigeria’s oil minister remains confident of OPEC’s ability to pump more, said the Singapore-based analyst.
This article is for general information purposes only. It is not investment advice or a solution to buy or sell securities. Opinions are the authors; not necessarily that of OANDA Corporation or any of its affiliates, subsidiaries, officers or directors. Leveraged trading is high risk and not suitable for all. You could lose all of your deposited funds.