By Sonny Atumah
The Trump administration imposed economic sanctions on Chinese state-owned oil trading company for buying Iranian oil in violation of American ban. US Secretary of State, Mike Pompeo said that the company, Zhuhai Zhenrong, and its chief executive, Li Youmin, were violating U.S. restrictions on Iran’s oil sector.
For the first time the Trump administration penalized a Chinese company for defying recent United States sanctions on Iranian oil exports. They are barred from engaging in foreign exchange, banking or property transactions under US jurisdiction. China’s foreign ministry responded by opposing the sanctions of China’s enterprises and individuals based on American domestic laws. China strongly condemned and firmly opposed sanctions on related Chinese companies by the US.
Many had wondered whether the US could punish Chinese companies over sanctions breaches of Iranian oil purchase as both countries are locked on issues of trade war. China is the world’s number one oil importer and major buyer of Iranian oil. Zhuhai Zhenrong until recently was the only importer of Iranian crude to China since it was set up 25 years ago. On November 4, 2018, the United States slammed new sanctions on Iran, as President Trump withdrew from the Iran Nuclear deal agreed in 2015 between Iran and five permanent members of the Security Council; Britain, China, France, Russia, United States, plus Germany, P5+1 that aimed to curb Iran’s nuclear ambitions. Iran exports about 1.1 million barrels of crude oil a day, was down from around 2.5 million barrels before the United States imposed sanctions in November. Washington’s decision was to bring Iranian oil exports to zero. The U.S. sanctions are meant to deny the regime its principal source of revenue by putting maximum pressure on Iran to withdraw its alleged destabilizing activities in the Middle East.
When it announced these sanctions in November, the United States granted the Significant Reduction Exceptions waivers to China, Greece, India, Italy, Japan, South Korea, Taiwan and Turkey that allowed them to continue their purchases of crude from Iran. The waivers allowed them more time to make up for the loss of supplies from Iran by finding new markets in major oil-producing countries in the Middle East, West Africa and Russia. China which is the largest importer of Iranian oil buys about a third of Iran’s crude exports. China opposed the sanctions on the basis of unilateralism and long-arm jurisdiction. China which may have been put in situation of not having easy access to crude imports for its slowing economy defiantly went against the United States sanctions by not cutting off oil supplies from Iran. Iran is hoping on Chinese purchases to help its economy withstand US pressure.
Iranian tankers appear to have loaded oil after the U.S. waivers ended with reports that Iranian oil cargo was first delivered to China in June. From Tanker trackers some Very Large Crude Carriers, VLCC discharged at Tianjin in early July after sailing from the Middle East. Iran-owned tankers including VLCC Stream discharged at Tianjin on June 19, while Amber, Salina and C. Infinity offloaded crude at the ports of Huangdao, Jianzhou and Ningbo.
Salina, which can carry more than a million barrels of crude oil, docked at Jianzhou Bay and unloaded on June 20. Since the ban on the purchase of Iranian oil by the United States in May, it was reported that millions of barrels of Iranian oil continued to flow into bonded storage tanks in Chinese ports for possible future use. The logic behind what is referred to as bonded storage is that such supplies do not cross Chinese customs or show up in the nation’s data of imports meaning that it is still owned by Iran since it is still in transit and in speculative contemplation. The interpretation is that it is not a breach of sanctions. But the bonded storage encourages Iran to produce more to build up supplies near the number one global oil buyer in the belief that one day sanctions would be over.
Analysts believe that the store of oil has the potential to push down global prices if Chinese refiners decide to draw on it, even as the Organization of the Petroleum Exporting Countries and allies in OPEC+ curb production as growth slows in major economic hubs. It also allows Iran to keep pumping and move oil nearer to potential buyers.
Iranian crude in bonded storage tanks in China also means Iran can avoid having to tie up part of its tanker fleet by storing the oil at sea for months at a time. The Iranians used floating storage from 2012 to 2016 and again in 2018 when buyers shunned its crude due to U.S.-imposed trade restrictions. The overall oil market remains relatively well supplied, with some traders saying prices could fall sharply if China steps up purchases of Iranian crude. Last week data showed that China imported 855,638 tons in June, the equivalent of about 209,000 barrels a day. The US-China relationship is indeed complicated. The trade war between the two economic superpowers may indeed, last longer and could jointly drive global economic growth a lot lower.