End of Cosco sanctions shows US reluctance for penalizing key oil market players: analysts

The Trump administration's decision to lift sanctions on affiliates of China's biggest shipping company may not be a sign the US "maximum pressure" campaign on Iran is weakening, but shows that sanctions on key oil market players are unlikely, analysts said.

"I think this signals that sanctions on major foreign companies, including those that may be systemically significant to certain economic sectors, are unsustainable," Elizabeth Rosenberg, director of the energy program at the Center for a New American Security and a former senior sanctions adviser at the Treasury Department, told S&P Global Platts Monday.

The lifting of sanctions against the affiliates of Cosco, similar to the January 2019 lifting of sanctions on Russian aluminum company Rusal, shows that the US is only looking to apply maximum sanctions pressure against major companies for a limited amount of time, Rosenberg said.

"That is, there may be a ticking time clock to negotiate terms for delisting and complete the agreement to do so when the United States aims at this scale of company," she said.

In a note, Henry Rome, an Iran analyst with Eurasia Group, wrote that the removal of the Cosco sanctions "signals that the US Treasury will be cautious about targeting major Chinese state-owned companies in the near term."

On September 25, Treasury sanctioned Cosco Shipping Tanker (Dalian) and Cosco Shipping Tanker (Dalian) Seaman and Ship Management for trading oil with Iran. Those sanctions, which were lifted Friday, initially caused VLCC freight rates to spike. Cosco Shipping controls more than 5% of the global VLCC fleet.

A senior administration official told Platts Saturday that the decision to lift the sanctions did not signal a shift in Iran policy.

"This administrative de-listing should not be misinterpreted as a change in policy," the official said. "Our maximum pressure campaign continues as before; we will sanction any sanctionable activity."

In a note, Kevin Book, managing director with ClearView Energy Partners, wrote that the lifting of the Cosco sanctions was likely part of an agreement under which China would agree to import less Iranian crude.

"The lifting of Cosco sanctions appears to reflect a workout to accommodate such consequences, and we anticipate a marked reduction of Chinese crude oil imports from Iran as part of that workout," Book wrote.

Rome with Eurasia Group wrote that Chian likely lobbied for the Cosco sanctions to be lifted during negotiations over phase one of the US-China trade agreement.

Earlier this month, Treasury Secretary Steven Mnuchin said Chinese state-owned companies have ceased buying Iranian oil, suggesting that only independent refiners continue making such purchases. He added that the US was "working closely with [China] to make sure that they cease all additional activities [with Iran]."

Mnuchin said that Treasury and State Department officials have met with Chinese officials to discuss curtailing imports of Iranian oil.

Iranian crude oil and condensate exports have plummeted to under 394,000 b/d in December 2019 from nearly 2.7 million b/d in April 2018, according to cFlow, Platts trade flow software, data and shipping sources. Yet China remains the largest importer, taking in 201,000 b/d in December, more than half of Iran's total exports, according to Platts and shipping sources.

In recent months, a large share of Iranian oil flowing to China has been going through the UAE and Malaysia, both of which are popular hubs for ship-to-ship transfers, according to sources.