The Fuse

A New Deal on the Rocks: Why Sanctions on Iran’s Oil Might Not Be Ending

by Gregory Brew | July 30, 2021

In April, it looked as though the United States and Iran were close to reaching an agreement that would reinstate the Joint Comprehensive Plan of Action (JCPOA).

Such a deal would end various sanctions on Iran’s economy, including measures implemented by the United States designed to bring Iran’s oil exports to “zero.”

Oil markets anticipated new Iranian output was just a few months away. Concerns mounted that new Iranian output would soon flood the market, killing the momentum of a price rally that saw oil near $80 for the first time in over a year.

New signs suggest an agreement is a long way off, if it comes at all.

But now the talks have taken a pause, and new signs suggest an agreement is a long way off, if it comes at all. Moreover, the effect of such a deal on markets might be less than analysts once feared, in part due to the fact that Iran has been selling substantial quantities of oil in defiance of US sanctions.

Upon the conclusion of the original nuclear deal in 2015, Iran’s oil exports rose to 2.8 million barrels per day (bpd) of crude and condensate, as the United States dropped sanctions that had restrained Iranian output. These sanctions went back into effect, however, when the US opted to leave the agreement in May 2018.

Pressure from the US caused Iran’s former customers, many of them in East Asia, to cease importing Iranian crude and products. As a result, Iran’s exports fell to 300,000 bpd in 2020 according to analysts who monitor the movements of oil tankers.

As a candidate for president, Joe Biden argued that the United States would return to the JCPOA under his administration. Iran’s leaders have stated that they would welcome the US back into the agreement (which, they contend, Iran has never left), so long as the US agreed to drop the sanctions imposed since May 2018. Biden and his advisors were careful to never promise this in public, agreeing only to discussions pertaining to a “mutual return to compliance.”

Iran has actually been selling large quantities of oil in clandestine fashion.

These discussions began in April 2021. Oil market analysts watched the progress of talks with interest. Officially, Iran exports very little oil. According to verified statistics, as little as 300,000 bpd leaves the country. Yet through a complex arrangement that includes at-sea transfers and tankers sailing without transponder identification, Iran has actually been selling large quantities of oil in clandestine fashion.

Nearly all of this oil goes to China. Much of it comes through Malaysia, where sales of “Malaysian oil” to China have been outpacing the total value of Malaysia’s oil output by as much as $500 million. This suggests that Iranian oil is being shipped to Malaysia, where it is then transferred and sold to Chinese carriers.

The upshot of this is that Iran is selling oil, albeit for a discount, in defiance of US sanctions. This mitigates the degree of leverage the US is able to exercise and weakens the US bargaining position during talks in Vienna to rejoin the JCPOA.

These talks proceeded through several stages before ending inconclusively in late June. While anticipation of a deal was high when talks began in early 2021, recent signs suggest that the gap between the United States and Iran may be widening, making an agreement more elusive.

Apart from its success to sell oil despite US sanctions, Iran has undergone internal political changes that might jeopardize an agreement. The departing administration of president Hasan Rouhani and foreign minister Javad Zarif was regarded as somewhat moderate and open to improving relations with the West. It was Rouhani and Zarif who concluded the original nuclear deal in 2015.

The new presidential administration of Ebrahim Raisi, on the other hand, is aligned with more hardline elements within Iran’s political system, including the Islamic Revolutionary Guard Corps. (IRGC). These elements were critical of the JCPOA and have rejected or criticized Rouhani’s recent attempts to restart a dialogue.

In late 2020, Iran’s parliament (which is dominated by such hardliners) passed a bill constraining the kinds of terms Iran can accept at the negotiating table. In his farewell address to the outgoing administration, Supreme Leader Ali Khamenei (who has final say over all foreign policy decisions) suggested that the United States could not be trusted to hold up its end the bargain, should a deal be struck in Vienna.

US officials have begun to doubt if a deal will be reached.

US officials have begun to doubt if a deal will be reached, raising the possibility of new sanctions if Iran continues to expand its nuclear program. US Secretary of State Anthony Blinken said that the process of negotiation could not go on “indefinitely,” suggesting Iran would have to make concessions or the United States would walk away.

JCPOA talks will resume after August 5, when Raisi officially takes office in Iran. Oil markets have moved from speculating when (and in what quantity) Iranian oil might return to the market. But recent signs suggest a great deal of Iranian oil is already on the market. And the flood of new crude and condensate that was presumably tied to a new US-Iran deal is still some way off, if it ever comes at all.

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