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TheStreet Open House

Iranian Oil Threats a Win-Win for China


NEW YORK ( TheStreet) -- China could win big oil concessions from Iran as the Islamic Republic faces the loss of major oil revenue from the tightening Western sanctions over its controversial nuclear program.

China currently buys one-third of Iran's oil exports, according to Rachel Shoemaker, head of Asia forecasting at specialist intelligence agency Exclusive Analysis, and losing a major customer like China, as other customers bow to Western pressure, is something that Iran simply cannot afford. Oil is a major source of the country's revenue that it needs both to keep the economy going and fund social programs required to keep its population content.

"Iran still needs the revenue generated from selling oil to run its economy," says Argus Research analyst Philip Weiss.

Right now, Iran is already at risk of losing this major customer, despite their important political ties, as China comes under mounting pressures by the West to reduce its imports of Iranian oil -- as are other important Asian players such as India, Japan and South Korea.

This, as the U.S. increasingly targets Iranian banks that handle such trades and urges countries such as China to seek alternate crude supplies, which the U.S. is trying to convince the United Arab Emirates and Saudi Arabia to provide, according to Shoemaker.

Today, Japan's finance minister Jun Azumi said that Japan will take concrete steps to cut oil imports from Iran.

Ultimately, all cards could fall in China's favor.

Shoemaker and her colleague, Teymur Huseynov of Exclusive Analysis' head of global energy consulting, for instance, say that Iran is likely to reduce official sales prices to the Asia-Pacific to try to beat offers from Saudi Arabia, and possibly Iraq.

"China is happy to get alternate supply sources if the U.S. will arrange them, while also benefitting from better prices negotiated with Iran -- this is the ideal position for China as it's a double win and provides more energy sources to mitigate supply issues," says Shoemaker.

Nic Brown, head of commodity research at Natixis says that Iran is already showing some signs of yielding, as it has cut prices for February crude deliveries to Asian buyers by $2 a barrel or more versus January prices.

"China is fantastic at manipulating market situations that plays into their hands" says Rich Ilczyszyn, Chief Market Strategist and Founder of iiTRADER.com.

Still, China's negotiating power could eventually hit a limit, especially if Iran were to retaliate against sanctions through the shutdown of the crucial Strait of Hormuz that allows the passage of as many as 20 million barrels of crude oil a day on tankers.

"If oil prices rally to $125 to $150, Iran will still command a good price for their oil and they have plenty to sell," says Carl Larry, president of Oil Outlooks and Opinions. "Iran has been busy storing a lot of their production on ships and are ready to move. These ships are outside the Persian Gulf so they would not be disrupted by any sort of conflict or disruption in the Strait of Hormuz."

A member of the Iranian military takes position in a drill on the shore of the sea of Oman, on Friday, Dec. 30, 2011. Iran's navy chief has reiterated for a second time in less than a week that his country can easily close the strategic Strait of Hormuz at the mouth of the Persian Gulf, the passageway through which a sixth of the world's oil flows.

Market rumors says that Iran has about 4 million to 8 million barrels on floating storage, says Larry.

Brown, head of commodity research at Natixis, also agrees that China would be able to command lower prices only to a certain extent, but with the view that "it is very difficult to implement a water-tight embargo."

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