LAUNCESTON: The US-Iran crude oil sanctions merry-go-round is starting to spin again with Asian crude buyers fretting over whether they will be allowed to continue imports from Tehran.
The US waivers on imports by eight of Iran’s top customers are due to expire early next month, and indications are that Washington may be considering a tougher line.
Against its desire to cut off Iran’s oil revenues, the administration of US President Donald Trump must balance the potential impact of the loss of Iranian exports on the crude market, especially in Asia, home to top buyers India and China.
Already, the impact of lower Iranian exports can be seen in pricing moves for various crude grades in the region, as traders and refiners try to compensate for the lower volumes.
It’s not just the loss of Iranian barrels that are roiling Asian markets. Lower Venezuelan exports are also having an impact.
Both countries are subject to US sanctions and both export heavier grades of crude that are preferred by many of Asia’s more advanced refineries because of their higher yields of middle distillates such as diesel and jet kerosene.
Refiners are having to draw up plans to deal with a potential shortage of heavier crude grades, given that at current levels Iranian exports are about 1 million barrels per day (bpd) below potential and those from Venezuela are down about 500,000 bpd.
Add in output restrictions by the Organisation of the Petroleum Exporting Countries (OPEC) and its allies, including Russia, and the market looks increasingly short of heavier grades in Asia.
US Crude Not a Panacea
Surging US shale oil production doesn’t help, as this type of crude is light and sweet, and it wouldn’t make sense for a refiner used to processing heavier grades to make the switch. The losses from the change in the output of the various refined products wouldn’t offset the cheaper cost of the light crude.
What is happening instead is that Asian refiners are being forced to pay premiums for heavier grades of crude, increasing their value relative to lighter oils.
Take the relatively obscure Australian grade Pyrenees, a heavy but low sulphur, or sweet, crude produced off the country’s northwest coast.
It has gained 43% this year to US$77.89 a barrel as of Tuesday, as assessed by Argus Media, outpacing the 31.5% gain for global benchmark Brent, a light crude.
Pyrenees used to trade at a discount to Brent and similar light grades. At the end of March last year, for example, it was at a US$1.66 a barrel discount to Nigeria’s Bonny Light.
With the advent of renewed US sanctions against Iran’s nuclear programme, however, Pyrenees has opened up a substantial US$4.97 a barrel premium to Bonny Light, illustrating just how much refiners will pay for heavier grades of crude.
It’s not just relatively small-output grades like Pyrenees that have witnessed this shift, with Iraq’s Basrah Heavy , a heavy and sour crude, narrowing its discount to Brent in recent weeks.
Basrah Heavy was assessed by Argus Media at US$69.05 on Tuesday, a discount of US$1.56 a barrel to the close for Brent futures. This is down from a discount of US$3.67 a barrel at the end of last year, again showing the relative outperformance of heavier crudes over lighter competitors.
The message the market seems to be sending the politicians is that there are unexpected consequences to cutting off, or curtailing, exports from Iran and Venezuela.
It’s not a simple matter of just saying the lost barrels can be made up from elsewhere. The quality and characteristics of the oil is almost as important as its availability.
For this reason, it’s likely that behind the scenes the Trump administration is being lobbied to allow exports from Iran to continue, while Washington is quite possibly lobbying OPEC leaders such as Saudi Arabia to produce more heavier crudes to meet the needs of Asian refiners.