The Ripple Effect of Iran’s Discounted Oil Flood: Global Markets and Saudi Arabia’s Output Conundrum

The world of oil trading is experiencing an unexpected surge, as Iran exports oil in volumes that have peaked to a five-year high in recent months. An uptick in demand from China and other nations is adding an expansive influx of discounted crude to an energy market already grappling with demand concerns. This oil tsunami from Iran is causing more than a ripple in the global oil landscape—it is threatening to capsize the efforts of major crude producers, including Saudi Arabia, in their bid to shore up oil prices by curtailing output.

The value of oil has plummeted about a fifth since late last year, largely due to anticipations of a slowing global economy and an excess of cheap Russian cargoes. With Iran’s oil shipments averaging about 1.6 million barrels a day in June and May, as reported by commodity-data providers Kpler and Petro-Logistics, this represents more than double the levels of a year ago and is the highest since 2018. This occurred when the re-imposition of U.S. sanctions resulted in a slump in Iranian oil exports.

This upward trend in Iran’s oil exports serves to highlight its growing ability to circumvent U.S. sanctions, at a time when the Biden administration is cautiously resuming talks with Tehran. The end goals are multifold—securing the release of American prisoners in Iran, and containing its burgeoning nuclear program.

While tracking the scale and final destination of Iran’s oil sales remains challenging due to their often clandestine nature, data indicate that China retains its position as the top customer. According to Kpler, Beijing directly imported 359,000 barrels a day of Iranian oil in May, marking an increase from approximately 266,000 barrels during the same month last year. Iran’s actual sales to China are likely higher, with oil being transshipped through other Asian and Middle Eastern countries.

China’s stance on U.S. sanctions against Iran has remained consistent—it does not adhere to them. However, Beijing has been reticent about disclosing data on oil imports from Iran following the re-imposition of sanctions by Washington. Besides China, Syria and Venezuela—both under U.S. sanctions—are among the top importers of Iranian crude. There is also a rising interest in Iranian oil from Latin America and Africa, say Iranian traders.

Iran is aggressively marketing its oil by offering a discount of about $30 a barrel compared with its Persian Gulf rivals, including Saudi Arabia. This discount places Iran in a competitive position against cheap Russian oil. For China, this availability of crude from Iran and Russia has facilitated the stockpiling of cheap oil as a safety net in case of an economic upswing and consequential rise in crude prices.

Iran’s increasing oil exports disrupt the efforts by the Saudi-led Organization of the Petroleum Exporting Countries (OPEC) to keep prices higher by limiting production. Iran is a member of OPEC, but its output quota within the cartel is suspended due to the U.S. sanctions. In contrast, Saudi Arabia has been steadily cutting output, but its attempts are being thwarted by Iran’s increasing shipments.

In the light of Iran’s oil boom, Saudi Arabia needs oil above $80 a barrel to fund its expansive economic program, as per analysts’ estimates. Despite the country’s best efforts, Brent crude, the international oil benchmark, has plummeted around 20% since OPEC+ initially rocked the market in October by reducing output by 2 million barrels a day.

Meanwhile, Iran is boosting its crude output. In May, it announced an increase to more than 3 million barrels a day, up from approximately 2.5 million barrels before the U.S. withdrew from the Iran nuclear accord in 2018 and re-imposed sanctions. Iranian officials argue that they are capitalizing on Saudi Arabia’s output cuts to fill the void and satiate Beijing’s increasing appetite for cheap oil.

The cash influx from surging oil exports is giving Iran’s economy a much-needed boost. Hemorrhaging from high inflation and a tumbling currency, the economy earned $28 billion from crude sales in the Persian calendar year ending in March 2023, a drastic leap from 2021’s earnings.

Additionally, Iran’s growing oil exports potentially equip it with increased leverage amid the latest diplomatic foray between Washington and Tehran. While the Biden administration seems intent on pacifying tensions, significant concessions are unlikely as the presidential campaign draws near.

Beyond oil, Iran has also been trading other hydrocarbon products, with India and Kenya purchasing numerous cargoes of Iranian asphalt, as per Kpler and Iranian oil traders.

In conclusion, the flood of cheap Iranian oil into global markets is generating far-reaching implications. It is challenging the current global energy order and transforming the market dynamics for dominant oil producers like Saudi Arabia. The coming months will be a litmus test for the resilience and adaptability of these nations in the face of Iran’s rising oil power.