Daily Management Review

Analysts Say If China Buys Iranian Oil, Crude Prices Could Drop By $30


Analysts Say If China Buys Iranian Oil, Crude Prices Could Drop By $30
Predictions by the Bank of America Merrill Lynch (BofA) estimated that if Iranian oil is bought by China as a measure to retaliate to the latest United States tariff measures, the price of a barrel of crude oil could drop by as much as $30.
“While we retain our $60 a barrel Brent forecast for next year, we admit that a Chinese decision to reinitiate Iran crude purchases could send oil prices into a tailspin,” a BofA Merrill Lynch Global Research report said. It also warned that in that scenario, the prices could sink by as much as $20-30 a barrel.
Following the threat by United States president Donald Trump of imposing a 10 per cent tariff on Chinese goods worth $300 billion, counter measures have been threatened by the Chinese Ministry of Commerce. The decision by Trump on Thursday resulted in a rude shock to the oil markets with a drop of 8 per cent in the price of crude which is the highest in the last four years.
While the market is awaiting the retaliatory response from China to the latest round of threatened US tariffs which are set ot be implemented from September 1, warning that “oil volatility is set to rise again” was issued by analysts.
“This decision would both undermine US foreign policy and cushion the negative terms-of-trade effects on the Chinese economy of rising US tariffs,” the report added.
According to data from S&P Global Platts, shipments of Iranian oil fell below 550,000 b/d (barrels per day) in June from about 875,000 b/d in May and about 2.5 million b/d in June 2018. The firm said that in June and July, about 50 per cent of the total export of Iranian oil was exported to China.
However according to analysts, if China decides to defy the US sanctions on Iran in a retaliation to the latest round of US tariffs on it and purchases Iranian oil, it would be a double edged sword. 
“Iran would welcome any opportunity to increase its production whether or not it breaches the terms of the U.S. sanctions, but the strategy there would introduce China to a partner over which it doesn’t have an enormous amount of control,” Edward Bell, Director of Commodities Research at Emirates said.
“Don’t forget there are other producers that would also be targeting that trade with China, so for instance you could see Iraq or Saudi Arabia step in and try and discount the volumes that they would be exporting to China as a way to circumvent Iran getting that extra market share,” he added.
A deteriorating demand outlook spooked investors resulting in a further drop in crude oil prices on Monday.
There can be a reduction of global oil demand by 250,000-500,000 barrels per day because of the latest round of US tariffs on China, said analysts at BofA Merrill Lynch. Such outlook created worries about threats to the fundamentals for crude because of a slowdown in demand.
“The kind of deterioration in global trade volumes that we’ve seen this year does mathematically lead into lower demand for crude oil,” Bell added. “If that carries on through the end of 2019 or perhaps even 2020 as we enter the firm end of the US election cycle when Trump is likely to want to maintain that hard stance on China, then it could be a very difficult barrier for crude to try and break through some of those demand concerns.”