Iran follows Russia’s example and sells oil at a discount


When we talk about the price per barrel of oil, we are talking about two benchmarks – one called Brent crude, mainly for oil from Europe and the Middle East – and West Texas Intermediate for oil from here in the United States . But the oil market is made up of many buyers and sellers. And if producers want to sell their product at a discount – below the applicable reference price – they can. This is what Iran is doing to compete with Russia…by selling oil to China.

Russia always produces more oil than it can use at home, so it has to sell it. But there aren’t many countries willing to buy Russian crude right now.

“It’s an interesting aspect of the supply and demand problem,” said Hugh Daigle, who teaches petroleum engineering at the University of Texas. “So what ends up happening is when there’s an oversupply, you end up selling it at a loss. And that’s what we’re seeing.

This puts buyers of Russian crude, like China and India, in the driver’s seat because the price is still so low even after they factor in the risk they are taking in going against world opinion and politics.

“The market kind of comes to that price or that discount where buyers are willing to take the risk and take on that volume. And sellers are ready to sell it,” said Abhi Rajendran, research director at Energy Intelligence.

With Russia selling at a discount, other sanctioned nations are forced to follow suit. For example, many countries, including the United States, have sanctions against Iranian oil. So Ellen R. Wald, president of Transversal Consulting, said they were also cutting prices.

“Kind of like there’s competition between the oil black market,” she said, adding that Iran has been navigating that market for some time. “Iran has had this problem where a lot of their oil has been sitting in what’s called floating storage, because they’ve already filled their storage capacity. And then they have to offload that oil somewhere.

But, now, getting rid of that sanctioned oil is more difficult, because there’s a new kid on the block.

“And so if their main current competitor for these barrels is what comes out of Russia, then they have to be able to match that price competitively. And if that means lowering the price they’re willing to get for their oil, then that’s what they’re going to do,” said Daigle of the University of Texas.

Daigle said Iran may continue to cut prices in order to sell oil because much of its government budget depends on oil sales. But the country’s marginal cost of producing a barrel is so low that the Iranian government can absorb the rebates.

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