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Though Iran’s newly elected president is expected to toughen the country’s stance against the West, analysts believe a deal will still be struck with the US to remove trade sanctions – a boon to both Iran’s oil exports and buyers in major Asian nations.

Over the past few months, informal talks have been staged in the Austrian city of Vienna between Iran and a host of world superpowers, including the US, over the possibility of restoring the Joint Comprehensive Plan of Action (JCPOA).

As part of the JCPOA, struck in 2015, Iran agreed to curb its nuclear activities in exchange for sanctions relief from the US, but the deal unravelled while former President Donald Trump was in the White House.

After Trump withdrew from the agreement in 2018, Tehran responded by breaching limits on its stockpile of enriched uranium, installing prohibited advanced centrifuges and enriching uranium to 60%, significantly in excess of the 3.67% agreed in the JCPOA.

Since talks between the two nations have been revived, Iran and the US both look set to re-engage formally with the JCPOA, though it’s unclear whether an agreement will be reached before Iran’s President-elect, Ebrahim Raisi, takes office in early August.

The hard-line conservative cleric is expected to adopt a tougher stance on the West than his predecessor, and according to the BBC has said that, while he welcomes JCPOA negotiations, he will not allow Vienna talks to be dragged out.

Raisi has further argued that all sanctions must be lifted, and that Iran’s ballistic missile programme and regional activities, which are of concern to the US and its allies, will not be part of negotiations.

Nevertheless, analysts expect a deal to be agreed sometime soon, with any pact likely to include provisions for Iran to swiftly ramp up oil exports.

Fernando Ferreira, a director at Washington DC-based energy consultancy firm Rapidan Energy, tells GTR that he doesn’t expect the recent election in Iran will have a sizeable impact on talks in Vienna, and “we expect a deal to happen in the coming weeks”.

“I’ve always been sceptical of how significant the elections are in terms of changing around foreign policy…. The foreign policy is dictated by the establishment that is above the presidency, from the Supreme Leader’s office. So the election doesn’t really change the willingness from those inside those top circles to negotiate and get back into the nuclear deal,” he says.

According to Ferreira, exports are expected to ramp up “fairly quickly” and could start to rise as early as August, with any deal likely to include comprehensive “upfront” oil waivers, allowing Iran to gain benefits from the JCPOA deal without having to wait for implementation.

Should such waivers be incorporated, Iran would not have to prove that it had reduced its nuclear stockpiles or mothballed its centrifuges before sanctions are lifted by the Biden administration.

Chris Page, an oil markets analyst at research firm Rystad Energy, tells GTR that while there is “no guarantee” an agreement will be struck between the US and Iran in the JCPOA discussions, his firm’s base case scenario is for sanctions to be lifted by Q3, which could bring Iran’s production to 4.5 million barrels per day.

Major commodity traders have also said they anticipate Iranian oil exports to return to the market in Q3 or Q4.

Speaking in the week prior to the election in Iran, at the FT Commodities event in mid-June, Alex Sanna, Glencore’s head of oil and gas marketing, said that the lifting of US sanctions has already been priced into forecasts and Iranian oil is expected to return in an “August to September timeframe”.

Meanwhile, Vitol’s chief executive, Russell Hardy, said that Iranian production is “probably going to come back at some time during the September, October, November period”.

 

Destinations for Iranian oil?

While a return to the JCPOA would allow Iran to increase its oil exports significantly, analysts say Tehran has been able to continue selling oil to a few choice buyers despite the squeeze from US sanctions.

Ferreira notes that the measures have been “massively effective”, with Iran’s crude oil exports plunging from around 2 million barrels a day or more, to about half a million barrels per day during the “maximum pressure period”.

However, he adds that countries like China and Syria have continued to purchase crude and condensates from Iran during this time.

China, in particular, has become an increasingly active buyer of Iranian crude since Biden took to the oval office, with Ferreira noting that Iran has already started to “ramp up exports to China based on the view that Biden would be reluctant to enforce sanctions while they’re negotiating in Vienna”.

According to a US congressional service research report, released in April, Iran was selling on average 900,000 barrels of crude per day to China in March this year.

Yet, while Iran’s oil exports won’t be starting from zero, experts say that restoring the JCPOA would allow the country to vastly scale up its exports to countries that currently remain reticent about buying from Tehran.

Rystad Energy’s Page say that Iran has 200 million barrels of oil stored offshore, so the country would be able to start selling quickly once sanctions are lifted. “I expect it would take around six months to ramp up production to full levels,” he adds.

Should a deal be reached, he says, China and India are likely to be top buyers, though he also anticipates other Asian nations such as South Korea and Japan to scale up imports.

According to the US congressional service report, China was the largest buyer of Iranian crude at an average of 700,000 barrels per day at the time the US exited from the JCPOA in May 2018. At the same time, India was buying 620,000 barrels per day, with Japan and South Korea purchasing more than 100,000 each on average.

Ferreira further points to European buyers as another likely source, with the US congressional analysis showing that Iran previously sold an average of more than 520,000 barrels of oil per day to the European Union.

There are also suggestions the Iranian government could look to branch out to countries that weren’t previously prolific buyers of Iranian crude.

Fereydoun Barkeshli, president of independent consultancy firm Vienna Energy Research Group, and former general manager for the National Iranian Oil Company (NIOC) in Opec, says Iran is keen to establish buyers in other Southeast Asian countries such as the Philippines, Thailand and Vietnam.

“National Iranian Oil Company awards premium discount to those markets and any other new markets where Iran hasn’t had access before,” Barkeshli tells GTR, adding that discounted prices can vary by country and length of contract.

Challenges ultimately remain for Iran’s oil sector, however, as the government looks to scale up production capacity.

According to reports from S&P Global, Iran’s oil minister Bijan Zanganeh said in late May the country should aim to boost its output to 6.5 million barrels per day.

However, Barkeshli says that the Iranian oil and gas sector has been severely deprived of investment and technology, with rich reservoirs in the Caspian Sea and North Iran “desperately awaiting investment and knowhow”.

At the same time, the appetite of international oil companies (IOCs) to plough money into sizeable projects in Iran could be constrained, given the potential for a Republican president to reclaim the White House in 2024.

French energy major Total pulled out of the US$4.8bn South Pars natural gas project in 2018, after failing to gain a sanctions waiver from the US government.

“[IOCs] will definitely be a lot more cautious… So Iran’s options when it comes to upstream financing are going to be limited. They’re going to be looking at China for that,” Ferreira says.