Asia's major crude buyers are finding ways around tough U.S. and EU sanctions to maintain imports from Iran, suggesting that, for now, the worst may be over for the OPEC producer that is losing more than $100 million a day in oil export revenues.
China, India, Japan and South Korea buy most of the one million barrels per day of crude Iran is able to export despite financial, shipping and insurance sanctions aimed at curbing funds for its controversial nuclear programme.
After a lull in imports in the middle of the year caused by Asian refineries reducing purchases as sanctions kicked in, analysts expect shipments to rise in August and September.
But on average, imports are likely to remain steady until the end of the year, unless the United States and the European Union come up with fresh sanctions to curb Iran's earnings.
"The drop in Iranian oil exports has levelled out over the past couple months at roughly 1 million barrels per day below 2011 levels," said Trevor Houser, a partner at the New York-based Rhodium Group and a former State Department adviser.
"I don't expect shipments to Asia to fall much further during the second half of the year, but don't expect them to increase much either."
At current prices, Iran is losing some $110 million a day in export earnings compared with the start of the year.
Japan more than doubled its August loadings to 7 million barrels compared with July to make up for disruptions through the middle of the year, while India is expected to follow suit and load 2 million barrels at most, industry sources say.
China, Iran's biggest oil customer and trading partner, kept August loadings unchanged from July at 8 million barrels.
The West suspects Iran is building nuclear weapons, which Tehran denies.
Insurance snag persists
Even though global markets are awash with crude, Iranian oil has retained its appeal with discounted prices, easier trade financing terms and because its grade of high-sulphur oil is well suited to many refineries.
Earlier this year, the United States granted allies Japan, South Korea and India a waiver from financial sanctions after they reduced purchases from Iran by around 15 percent in the first half of the year from year earlier levels.
China was given a U.S. waiver after imports fell by more than 20 percent during the same period compared to a y ear earlier due to a dispute over contract terms with Iran.
Imports were hit the most, however, by the EU's ban on providing insurance for Iranian oil shipments. EU insurers underwrite most maritime shipping, and insurers elsewhere have been unable to offer cover for the billions of dollars in claims that could stem from a spill.
The lack of cover prompted South Korea to halt shipments from Iran in July. Its loadings are set to resume in September after Korean refiners decided to follow counterparts in China and India and ask Iran to deliver crude on its own tankers, shifting responsibility to Iran for insurance.
So far, only Japan is providing refiners with government-backed insurance of up to $7.6 billion to ship Iranian oil. India's state-run insurers can provide some limited cover.
Making Iran responsible for insurance is risky in the event of an accident, industry experts say, and using its limited number of oil tankers is not a long-term solution because of new U.S. sanctions that will target the national tanker firm NITC.
"Insurance problems... shipping problems and transportation problems are persisting," said B. K. Namdeo, executive director at Hindustan Petroleum Corp., India's second-biggest refiner.
The International Energy Agency, in its latest report on Friday, estimated exports of Iranian oil had fallen to multi-year lows of 1 million barrels per day in July from 1.74 million in June.
It said there was scope for exports to rise by September, but Iran would continue to face "major difficulties".
Risky business
Sanctions could tighten further as the United States and the European Union try to choke off more Iranian funds. Tougher sanctions while the world economy is slowing down would limit the impact on oil prices.
Brent crude rose to a near four-year high of $128 a barrel in February, largely on worries about the loss of Iranian supplies, but has eased to around $112 as several major oil producers stepped up output just as demand for crude was waning due to the European debt crisis and weakening growth in the United States and China.
"I doubt we've seen the end of pressure on Asian consumers to avoid Iranian crude," said John Vautrain, an independent Bangkok-based energy consultant.
"The concerns about Iranian nuclear and other policies that gave rise to the sanctions are still there and they haven't gone away. Policy has now shifted and is intended to reduce the flow of Iranian oil," he said.
The United States is due to review the waivers it granted Iranian oil buyers in the months ahead, and will only renew them if nations show a consistent decline in purchases.
"A single month is not going to be the deciding factor," U.S. Deputy Energy Secretary Daniel Poneman said last month.
The temptation to take on more Iranian crude is strong, but Asian buyers are wary of the political risks. "What's the extra incentive for taking that kind of extra risk? We always like to toe a middle line," said a Chinese trader dealing with Iran, who declined to be identified because of the sensitivity of the subject.
Ken Koyama, a director at the Institute of Energy Economics of Japan, agreed.
"I think Asian buyers will maintain the basic downtrend in imports to balance their own needs with the pressure from the U.S. and Europe," Koyama said.
