It is not much in headlines, but it is in the making. Iran and the US have reached an understanding, paving the way for the release of US and Iranian prisoners held by Tehran and Washington, respectively, releasing frozen Iranian funds lying in South Korea and “other countries”, and the US is turning a blind eye to the growing Iranian oil exports.

The process has been quiet, lengthy, away from the galore of media and painstakingly slow. Yet has yielded results, carrying a profound impact on global crude dynamics and geopolitics.

The agreement secures the freedom of five imprisoned American nationals in exchange for several jailed Iranians and releases about $6 billion of frozen Iranian crude sales revenue in South Korea. The exact figure to be released under the agreement could be even larger.

Iran International, quoting media reports, suggested that as per the agreement, not only $6bn of Iranian crude sale funds frozen in South Korean banks would be released, but funds frozen in Iraq (estimated between $11-12bn) and over $3bn lying with Japanese banks will also be released.

Convergence of interest is bringing Iran and the US closer, which can help prevent the global crude oil markets from getting red hot

All these carry significant consequences for the energy world. After all, Iran’s objective is to produce and export additional crude. It wants sanctions to be eased on its crude sales. It also wants to be able to move its oil money swiftly, as per its requirements.

The Biden Administration is also reevaluating its priorities. It is concerned about the rising crude oil prices. It strategically needs to prevent crude oil market prices from spiking further. For months, it has been cajoling Saudi Arabia and its Organisation of the Petroleum Exporting Countries (Opec) allies to open their taps. Those attempts have failed. Opec kingpin Saudi Arabia is intent on keeping the markets tight. It wants to optimise returns.

Ever since the beginning of the Ukraine war, an urgency has crept into the US efforts. Squeezing the flow of petro-dollars into the Russian kitty became a major strategic objective for the US. To achieve this goal, Washington desperately needed support from Riyadh. That did not materialise. In open defiance to Washington, Riyadh coordinated its moves with Moscow and opted to keep the crude demand-supply balance tight by cutting output.

To checkmate the Saudi and Russian coordinated moves, Washington needed to work on several fronts. This included raising shale output. The US shale output has now risen to a record 12.8 million barrels per day (bpd), up from a previous forecast of 12.6m bpd. Last year, the US output averaged only about 11.9m bpd.

And to keep global markets well-oiled, Washington also opted to keep a ‘blind eye’ on the growing Iranian output, allowing its crude cargoes to flow more readily to China. Tehran is availing of this God-gifted opportunity.

Its crude output touched 3.1m bpd in July — the highest since the Trump Administration scrapped the nuclear accord with Iran. The country is now expecting its crude oil production to reach 3.5m bpd by the end of September, the head of the National Iranian Oil Company said earlier this month.

Iran’s crude exports have also exceeded the 1.4m bpd mark. China is its major market. Citing Kpler, Bloomberg reported last week that China is expected to import as much as 1.5m bpd of Iranian crude oil in August, the highest since 2013. During the period January to July 2023, China received, on average, 917,000 bpd of oil from Iran, the report estimated.

Additionally, Iran is also working to expand its capacity rapidly — 67 new oil and gas projects worth some $15bn should be operational in Iran by next March, the country’s first vice president, Mohammad Mokhber, said on August 17. Last year, Iran completed $12bn worth of projects in the oil and gas sector, Iran Front News reported.

And the US has opted to stay blind to all these, but at a cost.

It wants Iran to stop selling armed drones to Russia. It also wants Tehran to stop selling spare parts for the drones, which Moscow is using in the war in Ukraine, Financial Times reported citing an Iranian official and another person familiar with the talks.

Convergence of interest is bringing the two adversaries — Iran and the US — closer. And this also means that despite the Saudi and Russian efforts to squeeze supplies and raise market prices, other stakeholders are also in play.

This would help prevent the global crude oil markets from getting red hot.

Published in Dawn, The Business and Finance Weekly, August 21st, 2023