Newly passed US law on Iran sanctions may have limited impact in near term: experts

The Biden administration may leverage new Iran sanctions measures included in the recently passed US security package to pressure Chinese buyers to reduce exposure to Iranian oil, but the legislation is unlikely to have a big impact on oil trade in the near term, experts say.

“Since the Biden administration has not enforced existing US sanctions on Iran, expanding sanctions isn’t likely to matter,” Brenda Shaffer, an energy expert at the US Naval Postgraduate School, told S&P Global Commodity Insights April 24.

The US Senate on April 23 passed the security package, which the US House already approved.

The package included a measure that imposes sanctions on foreign ports, vessels and refineries involved in the trade of sanctioned Iranian petroleum products. The so-called Stop Harboring Iranian Petroleum Act also includes sanctions on entities involved in ship-to-ship transfers of Iranian oil.

The security package also included the Iran-China Energy Sanctions act, which requires the president to periodically determine whether any Chinese financial institution has engaged in the purchase of petroleum or petroleum products, as well as unmanned aerial vehicles, from Iran, according to a summary released by Senator Kevin Cramer, Republican-North Dakota. This measure also blocks US financial institutions from opening or maintaining certain accounts with Chinese financial institutions, the summary said.

It remains in question whether reinforced US sanctions will effectively subdue Iranian-origin crude flows to top customers such as China and Russia.

China buys around 90% of Iran’s crude exports, with independent refiners in the country often purchasing at steep discounts. In some cases, buyers trade goods instead of paying cash, and almost all Iranian cargoes are paid in Chinese yuan instead of dollars, according to market sources.
For example, Iranian Light crude was largely offered at a discount of $5-$5.50/b to ICE Brent, DES this week, steady versus last week, the sources said.

S&P Global estimates Iran’s fiscal breakeven oil price at $112/b in 2024, and $113/b in 2025 — well above current prices. Platts, part of S&P Global, assessed Dated Brent at $88.02/b April 24, compared with $84.89/b only a month ago.

Delayed impact

The new legislation expands sanctions on the Iranian oil trade since it includes secondary sanctions on financial institutions that facilitate that trade, Shaffer said. The legislation also requires the executive branch to report on implementation of the measures after 180 days, she noted.

“Thus, the White House doesn’t even have to play like it is enforcing sanctions until October,” Shaffer said. “The market has already learned that the Biden administration does not enforce sanctions that take barrels off the market. Thus, no impact on the oil market is expected.”

Serious action to limit Iran’s oil production and export is most likely to take place after the US presidential elections in November, Shaffer said. That action “could include unleashing Israel to take out some of Iran’s critical energy infrastructure,” she said.

The new legislation doesn’t add new sanctions powers but focuses on some nodes that are part of the supply chain, said Rachel Ziemba, a senior adviser at political risk consultancy Horizon Engage. It also adds more public scrutiny around this trade because the administration will have to report on its policies, she said.

Implementation questions

But there are still a lot of questions about how the measures will be implemented, especially since the legislation includes a waiver if entities have ceased their trade or are taking steps to reduce their involvement, Ziemba said.

“In practice, I think it may be used by the administration as attempted leverage on the Chinese to encourage them to reduce exposure, as indeed the teapot refineries did late in 2023 and early 2024 when they bought much less sanctioned oil,” she said.

The illicit nature of the trade makes it more difficult for the US to choke off, Ziemba said. For now, sanctions are likely to stay targeted and may prompt a modest decline in trade, she said.

So far, the Biden administration is not weighing in on the new Iran sanctions measures.

“We are of course going to implement the law, but I am not going to get ahead of the process here and will wait on speaking to any of the Iran-related provisions specifically for now,” Vedant Patel, deputy spokesperson for the Department of State, said during a press briefing April 24.

Without mentioning the sanctions measures, President Joe Biden said he would sign the measure into law as soon as it reaches his desk, according to a statement April 23.
Source: Platts