ANALYSIS: Asia hopes to revive love affair with Iranian crude sooner rather than later
Refiners in India and Japan await return of Iranian crude
Price relative to Saudi crude key to attracting customers
Options to expand for state-owned refineries in China
Asian refiners plan in advance to renew their love affair with Iranian crudes and fill a partial void of medium and sour qualities that the global oil market has experienced over the past two years, as hopes grows that Washington would likely lift sanctions against Tehran.
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While there is still no clear indication of the possible end result of the Washington-Tehran talks, optimism is growing that the floodgates for Iranian oil will open later this year. This should potentially widen the Brent / Dubai gap, redraw the balance between supply and demand for light crudes versus heavy crudes, and set the stage for a battle with rival producers in the Middle East.
Medium and heavy sour crudes have been scarce in recent years due to sanctions against Iran and Venezuela, as well as production cuts implemented by OPEC. Traders said any easing of sanctions would weigh on spot spreads for other grades of Middle Eastern crude.
“Additional Iranian barrels will be a strong prospect for Asian refiners amid the continued reduction in supply from OPEC +,” said Alex Yap, senior oil analyst at S&P Global Platts Analytics.
Iranian President Hassan Rouhani said in May that the “main deal” had been reached to restore the nuclear deal and that the United States is largely committed to lifting its sanctions on Iran’s oil, petrochemical and maritime sectors. .
Despite sanctions, Iran pumped 2.43 million b / d of crude in April, according to S&P Global Platts latest survey of OPEC production, up from 2 million b / d at the end of 2020, but still lower than its presanction production level of 3.8 to 3.9 million bpd.
“Japanese refiners will buy Iranian crude. Iranian crude is impossible to substitute for other grades and is unique,” said a trader at a North Asian refinery.
Oil prices have continued to climb as the global economy emerges from the aftermath of the pandemic, hurting demand in several price-sensitive oil-importing countries in Asia.
“India will buy only for economic reasons. The refineries, which have not been able to secure forward agreements with other producers in the Middle East, will switch to Iranian crude because their basket of qualities is working well,” said said a trader at a South Asian refinery.
India’s imports of crude from Iran have remained in the 200,000 to 250,000 bpd range under previous sanctions against Iran. After the sanctions were lifted in 2016, Indian state-owned refiners stepped up imports of Iranian crude, with Iran offering deep discounts on freight.
As a result, India’s crude imports from Iran continued to increase and in 2018 they imported around 500,000 b / d of crude from Iran, or around 11% of total crude imports that year. , according to shipping data.
Strategy to win back customers
Iranian crude grades compete with other grades from the Middle East, such as Saudi Heavy, Arab Light and Saudi Medium, Basrah Light, Basrah Medium and Basrah Heavy from Iraq, Upper Zakum from the United Arab Emirates, Oman Crude Blend and Kuwait Export Crude.
The price of Iranian crude also remains a key driver of demand among Asian buyers. Compared to the price of Arabian light from Saudi Arabia, official selling prices for Iranian light were 10 to 20 cents / bbl higher in 2018, although the gap narrowed significantly once sanctions were imposed, after which Iranian light was priced at parity or up to 30 cents / b lower than Arab Light.
Likewise, Iranian heavy crude prices were on average 30 to 80 cents / bbl higher than Arab Heavy in 2018. As a result of the sanctions, Iranian Heavy prices fell by 5 to 30 cents. / b below that of Arab Heavy.
In 2019, the prices of Iranian grades relative to Saudi Arabia came under pressure as the impact of the sanctions became increasingly evident. The price of Iranian Light was 30 to 60 cents / bbl less than Arab Light, while prices of Iranian Heavy were 70 cents / bbl less than Arab Heavy.
With an economy battered by sanctions, Iran will be keen to increase exports and win back customers by adopting a cautious pricing strategy, traders said.
Standardization of prices
China has remained a regular buyer of Iranian crude, and the removal of sanctions will likely give larger state-run refineries more options. These refineries bought lighter and medium Iranian qualities before the sanctions.
“We used to buy Iranian crude before the sanctions. The qualities work for us, especially the Iranian Light. And if the price is right, we will think about it,” said a crude oil trader in Singapore. .
On the contrary, purchases by independent refineries, which account for around 35% of China’s total crude oil imports, could face a roadblock once sanctions are lifted as more buyers compete for the same barrels.
“Independent refineries buy from Iranians only because of low prices. Once sanctions are lifted, the price will normalize after they don’t buy,” another crude oil trader in Singapore said.
Other refiners in the region are also monitoring when banks decide to start funding Iranian deals.