NEW DELHI—India's top two importers of crude oil from Iran plan to reduce shipments by at least 15% this financial year, people with knowledge of the move said, in an important victory for the U.S.-led sanctions effort against Tehran.
The shift came as a new report said that, in a sign international sanctions are having an effect, Iran's oil output has dropped to its lowest level in more than 20 years.
New Delhi, ahead of a visit next week by Secretary of State Hillary Clinton, eased up on its public defiance of U.S. efforts to isolate Iran, asking state-owned Mangalore Refinery & Petrochemicals Ltd. and closely held Essar Oil Ltd. to cut back imports of Iranian oil in the year that ends in March 2013, the people with knowledge of the move said.
Indian officials have said they would continue to buy from Tehran, but they will be increasingly stymied by efforts by the U.S. and European Union to strangle Iran's oil trade to get Tehran to make compromises on its nuclear program.
As a result of Iran's growing isolation, Iran's crude output fell to 3.2 million barrels a day in April, down 150,000 barrels a day in two months, according to Vienna-based JBC Energy GmbH. That level hadn't been hit since 1990, in the aftermath of the Iran-Iraq war.
Though Iran's oil production was already hurt by previous sanctions, a round this year targeting exports "is making things worse—reducing the amount of money Tehran itself has available to invest," said Trevor Houser, a partner at New York-based economic research firm Rhodium Group.
The Organization of Petroleum Exporting Countries has concluded that international oil markets are well supplied, in a cushion against fears that declines in Iranian production and exports will drive up prices.
Tehran says its nuclear program is for peaceful purposes, but the U.S. and others hold it is aimed at weapons production. Iran returned to negotiations over the program last month in Istanbul and has agreed to meet again on May 23 in Baghdad.
The return to the table came under pressure after the EU agreed to ban all oil imports from Iran from July 1, and European businesses began to sever ties. The U.S., meanwhile, introduced measures to isolate Iran's central bank, the main conduit for oil revenue. Those sanctions take effect on June 28.
Asian importers such as Japan and South Korea have trimmed their imports in the first quarter of 2012 following lobbying by the U.S. Though Beijing opposes sanctions, China cut its imports this year by more than half, customs data show, because of a pricing dispute.
Indian officials, however—riling the U.S.—have said their country, which imports 80% of its crude oil and relies on Tehran for 12% of those imports, needed to continue to buy Iranian oil to meet its needs.
The U.S. State Department said in March that 12 countries, including India and China, were at risk of sanctions because of purchases of Iranian oil. The Obama administration also gave waivers to Japan and EU nations that it said had moved quickly to cut Iranian imports.
But Mrs. Clinton earlier this year told Congress that India was cooperating on squeezing Iran much more than statements by government officials had conveyed.
New Delhi asked its top oil importers to cut back in the coming year because of demands from the U.S., one of the people familiar with the request said, adding: "Definitely, there is a lot of pressure from the U.S." A spokesman for India's oil ministry didn't respond to a request to comment.
India hasn't publicly said it was aiming to cut back on trade with Iran, and has sought to increase trade in other areas. Foreign Minister S.M. Krishna said last week that the nation's crude imports from Iran are guided by its energy-security needs.
But India has been forced to reduce its purchases as local refiners find it hard to get financing, shipping and insurance for Iranian oil because of U.S. sanctions pressure, Indian officials say.
"There's been an attempt to diversify our purchases. Things have become very complicated," Foreign Secretary Ranjan Mathai said in a recent interview.
Officials estimate India imported around 14 million tons of Iranian crude in the fiscal year that ended March 31—a drop of over 20% from the previous year.
Crude imports from Iran fell to 18.5 million tons in the year that ended March 31, 2011, from 21.2 million tons in the year ended March 31, 2010, according to government data.
India reached an agreement with Iran in February to pay for almost half of its oil imports from Tehran in Indian rupees because U.S. sanctions made using dollars for transactions nearly impossible. Iran has been looking at ways of buying more goods from India with the rupees it gets from selling its oil.
The reductions in crude imports from Iran, though, seem to reflect that India has little wiggle room.
On Wednesday, a sign of the difficulty of India's position emerged when food ministry officials in New Delhi indicated that a plan for Tehran to import as much as three million metric tons of wheat was facing obstacles. Tehran said it will buy Indian wheat only if it is completely free from a fungal disease. Indian officials called the demand an attempt by Iran to drive down the price, saying the fungus is commonly found in small traces in many countries' wheat supplies.
"We have asked them whether wheat supply from other countries is entirely free from disease," an Indian food ministry official said.
Iran and Pakistan have also disagreed over the price Tehran is willing to pay for wheat, Pakistani media said Wednesday.