Iran oil market realities: How buyers are positioning for the US sanctions

IRAN OILIn three months’ time, US sanctions on Iran are due to enter into force that could drive the Gulf nation’s exports down toward zero and upend the global oil market. There are already signs that it will be harder for the country to export, as some international insurers stop covering shipments.

The US measures require buyers to cut purchases or run the risk of their banks being excluded from the American financial system. If they do scale back, then there’s a risk of spiralling crude prices. A summary of the main Iranian oil importers’ reactions and positions is set out below. Observed flows and exports are from tanker tracking data compiled by Bloomberg. To calculate what that equates to as a share of each country’s overall purchases, import data from the Riyadh-based Joint Organisations Data Initiative were used.

China

Observed flows (Jan-June): 675,000 b/d
Share of observed exports (Jan -June): 26%
Share of imports (Dec-May): 7%
What government has said: While Beijing has agreed to not ramp up purchases from Iran, China has rejected a US request to cut them, according to two officials familiar with negotiations. China will continue to co-operate with Iran without violating international obligations, foreign ministry spokeswoman Hua Chunying said back in June. In July, China continued to pay for Iranian crude imports in yuan.
What companies have said: Nothing.

India

Observed flows (Jan-June): 597,000 b/d
Share of observed exports (Jan-June): 23%
Share of imports (Nov-Apr.): 11%
What government has said: Foreign Minister Sushma Swaraj at first stated that India only complied with UN-mandated sanctions. Then, in June, the oil ministry held a meeting with refiners and asked them to prepare for a scenario of ‘drastic or zero’ imports of Iranian oil from November, Reuters reported. The country is currently trying to find alternative payment methods to enable it to continue buying from the Islamic Republic.

What companies have said: Indian Oil Corp chairman Sanjiv Singh said in July that Saudi Arabia alone can cover most of the world’s supply shortfall if Iran’s oil exports dry up. “We have Plan B, Plan C, Plan D. We are fully prepared,” he said. IOC and Bharat Petroleum Corp kept buying Iranian crude in July and have started contracting oil from the Gulf country for August deliveries. Hindustan Petroleum Corp, the third biggest state refiner, is unlikely to buy any more Iranian oil until India gets a waiver from the US, since its new insurance cover for its refineries would be invalidated by processing Iranian oil, according to a person familiar with the matter.

Mangalore Refinery and Petrochemicals Ltd said in its annual report that it’s looking at alternative sources like Australia, West Africa and South America to supplement any reduction from Iran, which supplied a quarter of its oil needs. Shipping data compiled by Bloomberg show Reliance Industries Ltd, India’s largest petrochemical firm, cut Iranian oil imports in June, although month-on-month flows are prone to big swings.

South Korea

Observed flows (Jan-June): 286,000 b/d
Share of observed exports (Jan-June): 11%
Share of imports (Dec-May): 10%
What government has said: South Korea is waiting for an official response from the US on whether its refiners can continue importing Iranian crude and condensate during the 180-day wind-down period, an official from the nation’s energy ministry said in early July. The country already put some imports on hold in June. What companies have said: Refiners are substituting condensate from Iran with a processed fuel known as naphtha from elsewhere. SK Innovation Co, the Asian country’s top processor, Hanwha Total Petrochemical Co and Hyundai Oilbank Co all rushed to procure supply for July and August from other suppliers. Refiners didn’t buy supplies for July and will only decide whether to buy Iran’s South Pars condensate for the rest of the third quarter after negotiations between their government and the US administration.

Japan

Observed flows (Jan-June): 125,000
Share of observed exports (Jan-June): 5%
Share of imports (Dec-May): 4%
What government has said: Since the US pulled out of the Iran nuclear deal, Japan has sought a waiver from the US measures. Japan’s Finance Minister Taro Aso in June asked the US to give more clarity and reassurance to Japanese firms. Talks will continue, Japan’s foreign ministry said in early August. What companies have said: Japan’s refining industry wants the government to “tenaciously hold talks” with the US to get a waiver on America’s renewed sanctions on Iran, Takashi Tsukioka, chairman of refiner Idemitsu and of the Petroleum Association of Japan, said last month.

The executive sees it as “unreasonable” for Japan to be impacted in the same way as countries that have boosted Iranian oil imports. Japanese shipping companies and major banks, such as MUFG Bank and Mizuho Bank, have told oil distributors they may soon halt transactions with Iran. Refiners were told that the banks won’t handle transactions for Iran-related deals that were signed on or after May 8, and that those signed before that period will be dealt with “on case-by-case basis”. Idemitsu declined to comment on what the company will do in response. Fuji Oil is considering halting crude imports from Iran earlier than it expected. The firm hasn’t determined a deadline yet and is still processing oil supplied under long-term contract. Cosmo Energy said it will likely halt Iranian crude imports after taking July-loading cargoes — if Japan doesn’t receive waiver, according to people with knowledge of the matter.

UAE

Observed flows (Jan-June): 127,000 b/d
Share of observed exports (Jan-June): 5%
What government has said: Not much. The UAE has limited diplomatic relations with Iran, and withdrew its ambassador in Tehran in 2016. Abu Dhabi’s crown prince supports efforts to curb Iran’s influence in the region. Dubai, the UAE’s trade hub, does business with Iranian merchants and purchases condensate for its refineries. There were signs of flows from other countries rising in July at Iran’s expense. What companies have said: Dubai-based Emirates National Oil Co is trying alternatives to cargoes from the Islamic Republic, according to traders with knowledge of the matter.

European Union

Observed flows (Jan-June): 516,000 b/d
Share of observed exports (Jan-June): 20%
Share of imports (Dec-May): 5%
What public authorities have said: The bloc is determined to preserve the Iran nuclear deal and considers that the consequences of abandoning it could be “catastrophic,” according to the EU foreign-policy chief Federica Mogherini. In June, she stressed that the most important challenge was to find solutions on banking and finance to support “legitimate trade and investment.” In July, the US rejected French, British and German demands to grant waivers or exemptions to companies seeking to do business in Iran.

What companies have said: The lack of clarity on the scale of the reductions sought by the Trump administration has left several customers continuing to buy Iranian crude, although some showed less interest in resuming business with Iran. Austria’s OMV AG has suspended investment projects in Iran, but still has made no decision on imports, CEO Rainer Seele said in an interview with Tass news agency. Swiss lender Banque de Commerce et de Placements SA told customers that it would stop financing Iranian oil cargoes by June 30, Reuters reported. Vitol Group’s chairman, Ian Taylor, said in May it will be near impossible to avoid the sanctions.

Italy

Observed flows (Jan-June): 154,000 b/d
Share of observed exports (Jan-June): 6%
Share of imports (Dec-May): 13%
Iran is an important supplier to Saras SpA, but the refiner isn’t concerned about sourcing crude due to flexibility of operations, according to CEO Dario Scaffardi. The company is waiting for guidance from Italian and European authorities. ENI SpA said also in May that the company has no material exposure to Iran and will not be affected by the sanctions. CEO Claudi Descalzi did warn about the disruption ahead for oil markets in an interview with broadcaster CNBC.

Spain

Observed flows (Jan-June): 119,000 b/d
Share of observed exports (Jan-June): 5%
Share of imports (Dec-May): 9%
Compania Espanola de Petroleos SAU, or Cepsa, was to stop imports from early July, Reuters reported citing sources familiar with the matter. Also, in June, Repsol SA agreed to take the first spot cargo of Iran’s West Karoun oil region, 500,000 barrels of Pars crude.

France

Observed flows (Jan-June): 94,000 b/d
Share of observed exports (Jan-June): 4%
Share of imports (Dec-May): 10%
Total SA will hand over its share in the South Pars phase gas field development in the Gulf, Iran’s Oil Minister Bijan Namdar Zanganeh announced in June. “Within the US legal framework, we can’t work in Iran,” Total CEO Patrick Pouyanne said in July. “It’s impossible for a company like ours, and for most or even all global companies, even maybe the Chinese.”

Greece

Observed flows (Jan-June): 66,000 b/d
Share of observed exports (Jan-June): 3%
Share of imports (Dec-May): 16%
The country cut its Iranian imports to zero in June, but they rose again in July. Hellenic Petroleum SA said in May it was assessing its position and commercial arrangements following the US decision. The refiner said it will “comply with the applicable international regulatory framework,” and that it didn’t expect any significant effect on its operations.

Turkey

Observed flows (Jan-June): 176,000 b/d
Share of observed exports (Jan-June): 7%
Share of imports (Dec-May): 49%
What government has said: Turkish Foreign Minister Mevlut Cavusoglu said in late June that Turkey will not take part in US sanctions against Iran, according to local media reports. In a similar line to India’s foreign minister, Turkey’s former Minister of Economy Nihat Zeybekci had already announced in June that the US decision on Iran didn’t concern Turkey, and that it was not obliged to implement it unless there are UN sanctions.

Sources and photo-credits: Bloomberg, Gulf Times