Iran's new reformist regime spurs hope of stable crude flows to Asian buyers

Asian importers are hoping for some normalcy to oil trade flows from Iran, as the country's new reformist president pushes for a broader thaw in Tehran's relations with the West by reviving the nuclear deal and easing sanctions, according to analysts and traders.

While the appointment of reformist politician Masoud Pezeshkian as Iran's president may not immediately change Washington's policy on the issue, Asian crude buyers are glimpsing light at the end of the tunnel when it comes to the sanctions.

"Oil policy changes under the new regime will be largely dictated by the ability to reach a deal with the West to supply more crude to the markets. This needs to happen by September latest to have a meaningful downward impact on crude prices for the peak winter season," said Tushar Bansal, senior director at Munich-based consultancy EY Parthenon.

"Iran would also likely look for increasing investments by foreign players into its older fields to manage the production declines, if a deal with West materializes," he added.

Pezeshkian's presidential campaign focused on reviving the country's stalled nuclear deal with the West that curbs Tehran's expansive atomic activities, as well as removing international sanctions.

Calling the sanctions a "disaster", Pezeshkian has questioned the current government for what he said was selling oil below the market price.

Kang Wu, global head of oil demand research at S&P Global Commodity Insights, said Iran's oil production has gone up substantially since the lows of 2020 when Washington withdrew from the nuclear deal and reimposed sanctions.

"If US sanctions are removed -- which is not in our base case scenario for the short run -- Asian countries will benefit from normal imports of Iranian oil. Overall Iran production is expected to go up further if that happens," Wu said.

However, the ultimate authority in determining foreign policy and domestic decisions lies with Supreme Leader Ayatollah Ali Khamenei. Throughout his 35-year tenure, Khamenei has maintained a confrontational stance against the US and Israel but has also shown some pragmatism in avoiding an all-out war, according to Commodity Insights.

Analysts at Commodity Insights see Pezeshkian's victory having a "neutral" impact on crude prices.

North Asia's affinity for Iranian condensate

South Korean and Japanese refining industry participants are hopeful of a dialogue between Tehran and Washington following Pezeshkian's appointment.

"A lot of 'ifs' here... if only the new president could successfully revive the nuclear talks and if the US can somehow ease the sanctions against Iranian oil trades. Japanese refiners would actively resume purchasing Iranian crude and condensate. Japanese refiners are highly fond of Iranian Heavy and Forozan crude," a feedstock manager at a Japanese refiner said.

Prior to the sanctions on Tehran, South Korea was among the top three buyers of Iranian crude oil and Asia's biggest Iranian condensate importer.

In 2017, South Korea bought 148 million barrels of crude and condensate from Iran, data from state-run Korea National Oil Corp. showed.

Iran was Japan's sixth largest crude supplier in 2017 as Asia's fourth biggest crude importer took 172,216 b/d in that year, data from the Ministry of Economy, Trade and Industry showed.

"It would be a dream come true if we can resume purchasing South Pars condensate because the Iranian ultra-light crude was an essential feedstock prior to the sanctions," said a feedstock management source at Hanwha TotalEnergies.

China appetite in spotlight

Despite US sanctions targeting Iranian oil sales, the Islamic republic remains a key supplier of heavier crude grades to China.

"There might not be any change in their export policy in the short-term, not even in a year," said a Beijing-based analyst.

However, a source based out of China expects some political restructuring after the presidential election, which could "prompt some adjustment to the whole oil export process."

According to the source, demand for feedstock from Shandong independent refineries has remained low in recent months amid weak refining margins, with Iranian inflows largely stable at around 1.4 million-1.6 million b/d.

"Unless there is additional buying interest from other private mega refiners there might be no room to digest more inflows, even if more Iran cargoes are offered," the source added.

India -- a traditional buyer

After the first round of sanctions on Iran were lifted in 2016, Indian state-owned refiners stepped up imports as Iran offered steep discounts on freight.

By 2018 -- the year when sanctions were reimposed on Iran -- India imported about 500,000 b/d crude from Iran, accounting for about 11% of its total crude imports that year.

"Refiners in India will be very keen to buy Iranian oil the moment it's available. Most refiners are used to various grades of Iranian oil," said a local refining source.