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Analysis: European refiners tread carefully as US sanctions on Iran loom

London (Platts)--2 May 2018 530 am EDT/930 GMT


European buyers of Iranian oil are treading carefully as the May 12 deadline for US president Donald Trump to waive the oil-import related sanctions against Iran nears.


  • Iran crude remains very price competitive
  • Burgeoning demand for rival Iraqi, Saudi crudes
  • Sanctions might take time to implement

Demand for Iranian crude in Europe remains stable but interest for rival Iraqi and Saudi barrels are climbing amid the growing likelihood that US sanctions could restrict the country's crude flows.

Iran's top European oil buyersThese tensions have pushed oil prices near a four-year high in recent weeks and global refiners are gradually preparing for the loss of another possible source of crude.

If the re-imposition of sanctions include a restriction on the purchase and transportation of Iran crude, this could have a big impact on the global oil market.

But trading and industry sources told S&P Global Platts that even if that happens, the oil industry will be given a transitional period to adjust.

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European refiners said they are preparing for the possibility of sanctions on Iran but they will continue to import Iranian crude for May and June loading for now.

Europe takes around 700,000 b/d or one-third of Iranian crude exports, and is a key outlet for the OPEC member.

The nuclear agreement, known as the Joint Comprehensive Plan of Action (JCPOA) is at risk of unraveling. The US has repeatedly threatened to re-impose sanctions, potentially cutting exports by 1 million b/d.


PRICE COMPETITIVE


A trader for a Mediterranean refiner that is an active buyer of Iranian crude said his company is already looking to buy Iranian oil for the next few months but if the US imposes more banking restrictions then it will have to find alternatives.

"We are nominating cargoes in June for sure but [we have to be flexible] in case anything happens with sanctions," he said, adding that Iranian crude remains very price competitive compared to other regional sour crudes like Russia's Urals, Iraq's Basrah Light and Saudi Arabia's Arab Heavy.

"Overall, where official selling prices are right now, Iranian is the most profitable, but it is more a strategy than a pure question of price, as you have to factor that in due to banking restrictions," he said.

Sources also said that Saudi Arabia and Iraq, both of which produce similar crude to Iran, are most likely to benefit if US sanctions start to curb the supply of Iranian loadings.

"We see that Europeans have nominated cargoes in June. Some people might [start to] ask for slightly more Iraqi and Saudi barrels assuming that Iranian volumes are under sanctions," a trader for a European refiner said. "If there were additional difficulties to lift Iranian [oil], some volumes might be increased to others; a rebalancing of volumes but nothing big."

But some traders reiterated that Iranian crude remains very price competitive compared with other regional sour crudes.

"I prefer Iranian crude all things considered We have been discussing [the Iranian issue] a lot - but no one will know what happens," a third buyer or Iranian crude said. "I have to think about the refinery -- would prefer to keep the status quo -- would like to continue to get Iranian crude."

The key buyers of Iranian crude in this region are Turkey, France, Italy, Spain and Greece.

Sources said Turkey's purchases of Iranian oil are likely to be strong even if sanctions are re-imposed but that might not be the case for some of the countries in the EU.


GEOPOLITICAL RISK PREMIUM


Some analysts feel that unless Trump gets international support, particularly vocal support from Europe, his decision to withdraw from the deal may not have a substantial impact on Iran's oil exports.

"The US could limit Iran's access to its oil money and importers have to return Iran's money in goods, services or investment. But cutting its export would be not easy," said an analyst active in the Iranian oil sector.

Scott Modell, managing director of energy consultancy Rapidan Energy Group, said the lead-up to May 12 is increasing the geopolitical risk premium on crude oil and "everyone -- including Iran and US shale producers -- would stand to benefit as knee-jerk bullish headlines goose up oil prices", but it will have little to no impact on Iranian exports yet.

"If May 12 actually manages to take Iranian barrels off the market, Iran's competitors such as Iraq, Russia and US exporters of oil and condensate would have the dual benefit of higher oil prices and a prime opportunity to ramp up their own exports," he said.

Iran, the third-largest oil producer in OPEC after Saudi Arabia, is currently producing around 3.82 million b/d of crude oil, according to Platts estimates.

From 2011-2015 when the EU and US had levied sanctions on the transportation and purchase of Iranian crude, Iran saw its exports fall by almost 1 million b/d.

Iran has doubled its oil exports to about 2.2 million-2.3 million b/d since the nuclear deal was implemented in January 2016.

-- Eklavya Gupte with Gillian Carr, eklavya.gupte@spglobal.com

-- Edited by Jonathan Fox, jonathan.fox@spglobal.com




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