Last week in oil: The big Brent recovery as Iran sanctions loom

the close of last week, the Brent crude price had risen to $75.82 a barrel, with WTI (Nymex) also up late on Friday. (AFP)
Updated 25 August 2018

Last week in oil: The big Brent recovery as Iran sanctions loom

RIYADH: At the close of last week, the Brent crude price had risen to $75.82 a barrel, with WTI (Nymex) also up late on Friday.
Oil prices rose amid the fall in US crude inventories by 5.84 million barrels, the biggest drop in four weeks. Cushing, Oklahoma inventories were at multi-year lows, 40 million barrels down since mid-May. This was attributed to record-high US refining use amid healthy refining margins, and the summer driving season’s robust demand. Also, there has been a disruption of Syncrude production in Alberta since June.
The recovery in oil prices last week was also due to a tightening market as a result of the upcoming Iranian oil supply disruption.
Further tightening in the market came as S&P Global Platts figures showed sharply lower oil exports from Iran for the first half of August, down to 1.68 million barrels per day compared to July exports that averaged 2.32 million barrels per day.
In addition to the lack of upstream investment and new technologies, as the European oil supermajors have walked away from investing in Iranian upstream projects, Iran’s old oil fields are operating under severe production constraints and despite any cutback in exports, those fields will not be mothballed.
Instead they will keep pumping oil at a slow and steady pace. Iran will return to the 2012–2015 scenario, where it accumulated crude in floating storage vessels waiting for sanctions to end. This is the only way Iran can maintain production from its old wells. While Iran will still be producing, there will be fewer buyers.
Together, China and India have been the two largest purchasers of Iranian crude at about 1.2 million barrels per day. Unlike during the previous 2012-2015 sanction period, both China and India are trying in advance to navigate to other suppliers to partially replace Iranian crude. During the previous sanctions, China and India slightly trimmed their Iranian oil imports, but oil-to-goods swaps continued. When Iran had fewer customers both nations benefited from deeper discounts and took advantage of better terms. These trade swaps took years to settle.
It’s already clear that China and India are adopting different strategies in regard to Iranian oil. China is one of the biggest buyers of US oil exports. However, given the current China-US trade dispute, the Asian giant does not want to lose its Iranian crude imports. China has already been hit with the loss of Venezuelan crude, due to the collapse of production in the beleaguered South American nation. Now, China is indicating that it is still willing to purchase crude from Iran, even going so far as to switch to shipping the crude on vessels owned by the National Iranian Tanker Co.
On the other hand, India needs to maintain easy access to the US financial system and to do so it must aim to comply with the US sanctions policy. Like China, India has also lost access to 300,000 barrels per day of crude from Venezuela. It is aiming to purchase more oil from the US, Mexico, Azerbaijan and the Arabian Gulf, but replacing nearly 600,000 barrels per day of Iranian crude is a major undertaking. It seems that the economies of China and India are both vulnerable to the tightening oil market and uncertainties over supplies later this year, when US sanctions against Iran will start to bite.


Despite agreement, China purchase of US agriculture lags

Updated 10 August 2020

Despite agreement, China purchase of US agriculture lags

  • The two sides are set to meet on Saturday to discuss the deal, American media says

NEW YORK: Seven months after the United States and China signed a preliminary agreement to temper their trade war, Beijing’s purchases of US agricultural goods have yet to reach the deal’s target.

As President Donald Trump readies for a tough reelection battle in November, US media reported the two sides are set to meet beginning August 15 to discuss the deal, which calls for China to sharply increase buying American goods and services this year and next.

But according to data compiled by the Peterson Institute for International Economics (PIIE), Chinese agricultural purchases at the end of June were far from where they should be at this point in the year.

They had reached only 39 percent of their semiannual target, according to US figures, or 48 percent, based on Chinese figures.

“If we get back to what the level of trade was in 2017, we’ll be lucky,” said Chad Bown, a PIIE senior fellow who authored the study, referring to the year before the trade war began.

Under the deal’s terms, China agreed to increase agricultural imports $32 billion over the next 2 years from 2017 levels.

Chinese orders for corn and soybeans have increased since mid-July, with Beijing buying just over 3 million tons of American oilseeds between July 14 and Aug. 7, according to US Department of Agriculture data.

At the end of July, the United States reported the largest-ever daily order by China for its corn, of 1.9 million tons.

The announcements were a relief to US farmers, who are expecting a bumper crop this year and need to find buyers to take it.

They also came at a time of high political tension between the two countries, after the Trump administration authorized sanctions against several Hong Kong leaders over the rights crackdown in the city, and restrictions on Chinese apps WeChat and TikTok.

The Chinese “realize we’re not being the best of buddies right now, but they need the products and they’re gonna take as much as they need,” said Jack Scoville, agricultural market analyst for Price Futures Group.

It’s possible that Beijing will change its orders from buying this year’s harvest to next year’s.

But analysts warn that any orders could be called off before the ships carrying them leave port.

Brazil and Argentina, two of the world’s largest soybean and corn producers, are starting their harvests next spring, said Brian Hoops, president of the brokerage firm Midwest Market Solutions.

China “could cancel all these purchases they made in July and buy at much cheaper prices if that’s available to them,” Hoops said.

The trade deal dubbed “phase one” and signed in January has managed to survive both the tensions and the sharp global economic downturn caused by the coronavirus pandemic, which has badly hit international trade.

US Trade Representative Robert Lighthizer in June said China would follow through on its commitments, while Washington would also pursue a “phase two” trade deal that “will focus on issues of overcapacity, subsidization, disciplines on China’s state-owned enterprises, and cyber theft.”

Bown said any success in getting China to buy not just farm but also energy and manufactured goods, would aid Trump in his reelection campaign.