In Oil & Companies News 20/01/2016
The lifting of sanctions on Iran is likely to see Europe — and especially the Mediterranean — emerge as the primary destination for additional Iranian crude oil shipments, at least initially, analysts and trading sources said.
The US and EU late Saturday lifted key sanctions against Iran, removing constraints that have capped its crude exports at just 1 million b/d over the past four years.
Iran’s oil ministry was quick to activate plans Sunday to raise output by 500,000 b/d, issuing an order to its state-owned companies to increase production and placing the National Iranian Oil Terminals Company on standby.
European refineries had been, in turn, on standby while talks for lifting the sanctions were under way in 2015.
“We think that Iran will be looking to re-establish the European outlets it supplied pre-sanctions, and that refiners — especially in the Med — will be interested in buying these barrels,” said Stephen George, chief economist at KBC Advanced Technologies.
Spanish and Italian refiners have already indicated that they are interested in resuming Iranian crude imports once the sanctions are lifted.
During a conference call last year, Saras General Manager Dario Scaffardi said the Sardinian refiner has been “contacted to set up the contracts so we are ready to work.”
At the end of last week, just a day before the final decision was made, a Cepsa spokesman said that, for the Spanish refiner, “Iran has always been an alternative to our purchase crude basket and Cepsa have maintained a business relationship with them for long.”
The spokesman added that, once the sanctions are lifted, “we might consider including them among our options.”
In 2011, the year before Brussels banned the import of Iranian oil, Tehran supplied almost 600,000 b/d of crude to the EU. More than half of this volume went to Italy (183,350 b/d) and Spain (150,475 b/d).
According to KBC estimates, initially 150,000-200,000 b/d of Iranian crude could now be heading to European refineries.
REGAINING MARKET SHARE
The resumption of deliveries may face a short-term delay “while buyers re-establish their buying capabilities — insurance, letters of credit, etc,” George said.
The “infrastructure — on payment and freight” will also need time to get ready to accommodate the arrival of Iranian barrels, said a trading source.
But whatever happens in the short term, a much more serious challenge for Iran will be to regain its previous share of the European oil market.
Iranian officials have said they will target European buyers in a bid to regain their lost market share. Europe will be “100% a target” market after the Western sanctions are lifted, Iranian Oil Terminals Company Director Pirouz Mousavi said Friday.
“[The return of Iranian crude] will show a lot of new movements in the Med, since I assume the volumes that cannot be placed [elsewhere] will land here,” said a Europe-based crude trader.
Earlier Monday, sources in Asia indicated that Asian buyers are unlikely to compete for additional Iranian crude and Europe will be the most likely destination.
This could prove to be quite daunting as Europe is currently awash with crude.
Between 2011 and 2014, for example, Iraqi supplies to Europe rose by 128,000 b/d, according to data from Eurostat. Iraqi crude is similar in quality to some Iranian crude grades.
CRUDE FLOWS TO CHANGE, PRICES DROP Iranian crude will compete with and may displace other sour barrels, one Northwest European trader said, adding that “Urals, Saudi, Basrah will now have another competitor.”
With more competition, European refiners will see a bigger choice of crude and most likely lower prices.
“The return of Iranian barrels will likely inspire Saudi, Iraq and Russia to do some discounting,” George added.
In addition, crude from West Africa and Saudi Arabia will likely have to look for alternative markets.
“Incremental WAF will go into the US as a blending barrel for Middle Eastern heavy crudes,” said a London-based trader, adding that more Saudi grades may also head to the US “as cheaper Iranian [oil] takes its place” in Europe.
Increased supply from Iran will also affect demand for Russian, Caspian, North Sea grades.
While crude producers will be facing more competition, especially in the Mediterranean, refiners in the region will see big advantages.
But not everybody is convinced that European refiners will be eager to take the Iranian barrels quickly, as some of oil has been lying in floating storage, while some may come out as “new production,” a trader said.
“European refineries would not take the risk in running them” until they have tested the new crude quality, he said.
