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ANALYSIS: Large consumers switch from Iran to Saudi oil ahead of sanctions

03.02.2012  |  HP News Services

Keywords: [Iran] [Saudi Arabia] [crude oil] [US] [EU] [sanctions]

By BENOIT FAUCON and SUMMER SAID

Japan and Spain said this week they had reduced Iranian oil imports and switched to Saudi crude, providing the first evidence that some of Iran's largest customer nations are reducing their reliance ahead of stifling sanctions this summer.

The disclosures come as Iran's customers are rushing to sign new supply deals with rival producers, triggering expectations that the Islamic Republic's overall shipments - now broadly stable - could fall by the summer.

The United Kingdom and France had previously stopped buying oil from Iran, though neither had made Iranian crude purchases on the same scale as Japan and Spain in recent months.

"Saudi exports surged recently [to 9 million barrels of oil a day] because some customers are preparing for what might happen [this summer] with regards to Iran," a senior Saudi oil official said this week.

An arm of the US Department of Energy warned Wednesday that the oil market is tightening partly because of the problems faced by Iran, the world's third-largest oil exporter.

That risks pushing up the price motorists pay at the pump, the US Energy Information Administration said.

Iran's oil sales to Japan, its third-largest customer, fell 12% in January compared with a year earlier, data from Tokyo's Ministry of Finance revealed Tuesday.

Tehran's oil was partly displaced by Saudi Arabia, whose exports to Japan shot up 19.6% in the same period.

Spanish imports of Iranian crude - one of Iran's top three clients in the European Union - fell by 37% in December on a monthly basis, and Saudi Arabia filled much of that shortfall, according to data released Monday by Madrid's strategic hydrocarbons reserve board CORES.

The December figures are the most recently available from CORES.

Japan and Spain didn't say they had cut their Iranian oil purchases because of sanctions, but the moves have occurred as the West ratchets up pressure on Iran's controversial nuclear program.

The US is set to ban all oil trades with Iran's central bank, beginning in June. The European Union is then set to embargo all Iranian oil from July 1.

Washington is using the measure as a stick to force Japan and South Korea to consider cuts on Iranian oil supplies or risk being shut out of business on Wall Street.

Yet even before Iran is hammered by these unprecedented measures, narrower sanctions on Iranian banks, oil shipments and insurance that came into force in January are hitting Iran's oil trades.

India and China have struggled to find methods to bypass the new banking sanctions while some shippers in Asia refuse to load Iran's crude because they use EU insurance.

"There is emerging evidence that some shipments of Iranian crude oil under existing contracts are being curtailed due to the unwillingness of US and EU insurance providers to cover them," the EIA said Wednesday.

While Iran faces challenges to its oil sales, its customers are offering to buy more crude from rivals in the coming months.

India, Iran's second-largest oil buyer, has contacted Saudi Arabia and Iraq in recent days as it seeks fresh supplies for expanding refiners in its new financial year starting in April, according to Indian oil minister Jaipal Reddy.

Even so, Reddy said India expects its crude imports from the Islamic Republic to be at normal levels, not higher, in the coming months.

For now, Iran says its crude-oil exports are stable at 2.2 million bpd.

An oil-tracking expert, who confirmed the shipments were broadly stable, said cuts in oil purchases by some countries were made up by higher Iranian short-term storage at sea, which it counts as exports, and increased buying by others on a temporary basis.

Shipping brokerage ICAP said Friday that Iran is temporarily storing oil outside its territorial waters on four very large crude carriers, each capable of carrying 2 million bbl of oil.

Iran had no short-term floating storage two weeks ago, according to ICAP.

But such mitigating factors may be short-lived. There is a risk temporary storage may become permanent as Iran faces challenges to selling its crude.

The lack of new demand from non-EU buyers casts doubt on Iran's claim that it can find replacements for sales lost due to Brussels' ban.

Trevor Houser, a partner at New York-based economic research firm Rhodium Group, said in a note Wednesday that he expects 650,000 to 775,000 bpd of Iranian crude "will be looking for a new home" by the summer.

Ehsan Ul-Haq, a senior staff consultant at UK-based KBC Advanced Technologies, forecasts an even larger drop in Tehran's oil exports. He said they will fall by about half to 1.1 million or 1.2 million bpd by early May.

Iran's oil minister Rostam Ghasemi appeared to acknowledge the problem when he said last month that the country planned to curb crude-oil exports.

But if Iran's exports decline, as many experts expect, then other oil producers such as Saudi Arabia will need to draw on their own spare production capacity, reducing the cushion of available oil production to uncomfortable levels and boosting global oil prices.

The EIA said Wednesday that global spare oil production capacity was at 2.5 million bpd, its lowest level since late 2008.

That level is "modest" when "considered in the context of current geopolitical uncertainties, including, but not limited to, the situation in Iran," the administration said.

The EIA defines spare capacity as the amount of additional oil production that can be brought on-stream within 30 days and sustained for at least 90 days.

"Low spare oil production capacity tends to be associated with high oil prices and high oil price volatility," it said.


Dow Jones Newswires



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