Key Takeaways:
Iran has found new customers for its oil in Bangladesh and Oman, despite U.S. sanctions.
Iranian oil production reached 3.2 million barrels per day in July 2024, the highest since 2018.
These sales undermine U.S. sanctions effectiveness and may contribute to a gradual shift away from the U.S. dollar in international trade.
The U.S. is likely to target intermediaries facilitating Iranian oil sales rather than directly punishing buying countries.
OPEC+ may consider reintroducing output quotas for Iran due to its increasing production and discounted prices.
Increased oil sales allow Iran to diversify its customer base, pursue a more independent foreign policy, and continue funding proxies in the Middle East.
Background
Iran has found new customers for its oil after Bangladesh and Oman began receiving small shipments this year. This marks a significant shift in the country’s oil-exporting strategy amid U.S. sanctions, which it has been contending with since November 2018. The shipments to Bangladesh were conducted via ship-to-ship transfers near Chittagong Bangladesh in April of this year. These transfers often help conceal the cargo's origin, allowing Iran to navigate U.S. sanctions. In Oman, a shipment of Iranian oil was received at the port of Sohar via ship-to-ship transfer.
Iranian Oil Minister Javad Owji said in July that Iran was selling crude oil to 17 countries. Among these countries are European states, however, the veracity of these claims could not be verified. However, in doing so he is effectively challenging the international sanctions regime aimed at curtailing its oil exports and highlights Iran's growing ability to circumvent sanctions through diversified sales channels.
Diversification of its oil export destinations is part of Iran’s strategy to maximise production and sustain revenue amidst severe economic challenges. Iran, which is exempt from output quotas set by OPEC+, has had continued success in this regard. After steep production falls following the US withdrawal from the Joint Comprehensive Plan of Action (JCPOA) and the introduction of sanctions in 2018, oil production has seen year-on-production increases since 2021. In July 2024 it reached 3.2 million barrels per day (bpd), the highest output level since 2018.
Looking Forward
· The purchase of Iranian oil by Bangladesh and Oman undermines the effectiveness of U.S. sanctions as a foreign policy tool and suggests there is a growing willingness among nations to circumvent the US-led financial systems. KSG assesses that the necessity to utilise non-dollar-denominated transactions to facilitate such trades is part of a trend that indicates a gradual shift away from the US dollar as the world's reserve currency. Nonetheless, such trends do not constitute a rapid shift away from the dollar. Instead, they represent the exploitation of a particularly cheap source of oil, as Iran is forced to sell at a discounted rate.
· However, KSG assesses that the sale will not elicit a strong response from the US. Given the heightening tensions between the US and China – in addition to Russia and Iran – the US will be reluctant to exact tough consequences on countries considered middle powers (Bangladesh) and of geo-strategic importance to US military interests (Oman). This is especially the case for Bangladesh. As it has been left in a fragile political situation following the self-imposed exile of its long-serving Prime Minister Sheikh Hasina, the U.S. will want to build cordial relations with the country’s future government.
· As opposed to targeting states directly, the U.S. is highly likely to continue pursuing the intermediaries that facilitate the sale of Iranian oil. This follows past precedent, as was the case in early 2024 when a Chinese and an Omani national were charged with the trafficking of Iranian oil and using the proceeds to fund Iran’s Islamic Revolutionary Guard Corps.
· Nonetheless, KSG assesses that the ramping up of Iranian oil production has a limited ceiling. Iran is currently exempt from output quotas set by OPEC+, however, given that other OPEC+ members run economies heavily dependent on oil sales – often planning government budgets with a minimum oil price in mind – and that Iran’s discounted oil (due to its sanction status) is likely to make it an ever more popular supplier, KSG considers there is a high probability that OPEC+ will discuss reintroducing output quotas for Iran. This is especially the case given that OPEC+ decided to continue collective crude production cuts into 2025.
· Increased oil sales diversify Iran's customer base, reducing its reliance on major buyers like China and enhancing its economic autonomy. This financial boost enables Iran to pursue a more independent foreign policy, less constrained by external pressures. Additionally, the increased revenue allows Iran to continue funding its network of proxies across the Middle East, maintaining its regional influence and perpetuating tensions with rival states. This cycle of increased oil sales, greater autonomy, and sustained proxy support contributes to ongoing instability in the region. Especially for business sensitive areas such as the Red Sea and Straight of Hormuz.