China has an Iran oil lever over Trump, and it's all playing out at OPEC meeting

Scott Sheffield, CEO of Pioneer Natural Resources
Adam Jeffery | CNBC
Scott Sheffield, CEO of Pioneer Natural Resources
  • In the tit-for-tat tariff war with the U.S., China said last week it would put tariffs on U.S. oil imports.
  • As the world's largest importer of crude, China could tilt the scales in determining how much Iranian crude will be taken off the world market.
  • Oil customers have been scrambling to replace Iranian barrels because of the financial restrictions President Donald Trump has put on companies that would deal with Iran.
  • That shifting of oil supply is an issue at the heart of debate at this week's OPEC meeting.

The U.S. trade dispute with China, in a roundabout way, could determine how successful the U.S. will be in sanctioning Iran's oil this time around — and that uncertainty is also playing out at OPEC.

In the tit-for-tat tariff war with the U.S., China said last week it would put tariffs on U.S. oil imports. The U.S. is not a major oil exporter, but it has been growing exports and is exporting about 2 million barrels a day of crude. About 300,000 barrels of that heads to China each day, and China could stop those purchases depending on how the trade dispute develops with the U.S., according to Scott Sheffield, executive chairman of Pioneer National Resources.

At the same time, China is a major player, and as the biggest importer of crude it could tilt the world scales in determining how much Iranian crude will be taken off the world market. Analysts expect buyers of Iranian crude in Europe and places such as Japan and South Korea to slow down or stop buying Iranian supply before the end of the year.

The Organization of the Petroleum Exporting Countries, meanwhile, sees a need to return oil to the market because of Iran and other outages, including the steady decline in Venezuelan output, but its members are squabbling among themselves over how much oil to return to the market, and that decision is critical to OPEC's deal of cooperation with Russia and other producers who meet on Saturday.

OPEC's discussions of how much oil to return to the market are also key to its agreement with Russia and other producers, but there is disagreement. Saudi Arabia is believed to want to return 500,00 to 600,000 barrels to the market, but Iran objects to increasing output. Russia's energy minister has said Russia would like to return 1.5 million barrels a day just for the third quarter and take measure of the market after that.

Scott Sheffield, CEO of Pioneer Natural Resources
Adam Jeffery | CNBC
Scott Sheffield, CEO of Pioneer Natural Resources

"If OPEC doesn't do something, I think we will see a $100 oil price," Sheffield said. He was speaking to CNBC on the sidelines of an OPEC seminar, a two-day event in Vienna including global industry leaders ahead of Friday's OPEC ministerial meeting.

Sheffield said China and India remain the two wild cards when it comes to Iran, though India's state bank has warned about curbing financing for Indian refiners buying Iranian crude. China could curb, maintain or even increase its purchases of Iranian oil. China had a system for purchasing Iranian crude with a separate entity and payment system that did not engage with the U.S. banking system the last time sanctions were imposed on Iran, and analysts say it could use that method again to buy Iranian imports that would most likely come to it at a discount.

Oil customers have been scrambling to replace Iranian barrels because of the financial restrictions President Donald Trump has put on companies that would deal with Iran. That shifting of oil supply is an issue at the heart of debate at this week's OPEC meeting.

"OPEC doesn't know if 200,000 or a million barrels of Iranian oil will be off the market," said Sheffield. Iran exports about 2.4 million barrels a day, and analysts expect the U.S. sanctions to remove about 500,000 from the world market by the end of the year. The last time the U.S. and other nations sanctioned Iran, about 1.2 million barrels a day were taken off the market. Sheffield said there would be other buyers for any U.S. crude that China does not take.

This week's headlines from OPEC have focused on the fiery comments of Iran Oil Minister Bijan Namdar Zanganeh, who has been blasting Trump for politicizing oil when he blamed OPEC for high prices and reinstated sanctions on Iran.

"The real responsibility for oil prices being high lies with the president of the United States," Zanganeh told the seminar. He said oil prices have risen since Trump withdrew from the nuclear deal. Trump has twice blamed OPEC for high prices on Twitter.

Zanganeh also said OPEC is an independent organization and Trump cannot turn it against one of its founding members.

In conjunction with the end of the nuclear deal, U.S. officials have sought help from Saudi Arabia to keep the market stable. Both Saudi Arabia and Russia have said they would like to return oil to the market, since their 18-month-long effort to curb oil production by 1.8 million barrels a day has depleted a world oil glut and sent prices higher.

Russia Deputy Energy Minister Alexey Teksler told the seminar he is confident OPEC and other producers will reach an agreement on new production goals by Saturday's meeting.

"Numbers will keep on changing, but the agreement should not change. We should keep it intact," said Oman Energy Minister Mohammed bin Hamad Al-Rumhy.

The sanctions on Iran were reinstated when Trump decided last month to withdraw from the Iran nuclear deal between Iran and six nations because he felt the terms were too favorable toward Iran.

Sheffield was the first representative of the U.S. shale oil industry to speak at an OPEC summit. OPEC has sought to engage shale players for the past two years as U.S. production boomed and has now surpassed that of Saudi Arabia.