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Iranian Oil Sanctions

A News Feature

Iran's oil exports hold at higher levels as nuke deal extended

By Margaret McQuaile in London

July 28, 2014 - The July 25 agreement between Iran and six world powers to extend their interim six-month nuclear deal by four months effectively rules out the likelihood of any significant increase in Iranian crude flows during the remainder of this year.

Indeed, even if negotiators do reach a comprehensive nuclear settlement by the new deadline of November 24, unravelling the sanctions could take a considerable amount of time and it could be well into the first half of next year before Iran is in a position to export its oil freely.

But there is little doubt that Iran's crude exports have risen in recent months beyond the 1 million b/d level targeted by the United States.

China, India, Japan, South Korea, Turkey and Taiwan have been able to continue to buy Iranian oil without incurring US financial sanctions by reducing their volumes. Iran had been exporting some 2.2-2.3 million b/d before the European Union and United States imposed swingeing oil and financial sanctions in mid-2012.

Analysis continues below...

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The International Energy Agency estimates that imports of Iranian crude by the six buying countries averaged 1.1 million b/d last year.

The past few months, however, have seen the combined volume imported by the six buyers climb considerably. In February, for example, the import total averaged 1.47 million b/d, according to official import figures and, in the case of India, shipping data analyzed by Platts.

The volume dipped back to 1.26 million b/d in March, edged up to 1.29 million b/d in April and climbed to 1.46 million b/d in May.

Japan, Turkey and Taiwan (Taiwan's imports of Iranian oil are negligible) have yet to release data for June, making it difficult to come up with an estimate for average imports by the six over the first half of this year.

However, the data for China, India and South Korea show that these three countries alone imported an average 1.05 million b/d over the January-to-June period, similar to their 1.09 million b/d average for the first five months of the year. Including Japan and Turkey, imports of Iranian crude over the January-to-May period averaged around 1.37 million b/d.

China, India buying more

These higher numbers are due mainly to an increase in shipments to China and India, the two biggest importers of Iranian crude.

The data shows combined imports by China and India averaging 1.11 million b/d in May, the highest monthly volume this year, although the combined volume slid in June to 718,735 b/d.

Over the first six months of 2014, though, these two countries together imported an average of 929,161 b/d. Over the same six months of 2013, India and China imported an average 658,487 b/d.

According to the IEA and other analysts, the higher volumes of Iranian crude imported by China coincide with an apparent increase in the country's strategic stockpiles.

One of the concessions the US made as part of the interim pact agreed last November and which came into force on January 20 this year was to "pause" pressure on Iran's customers to make further reductions in volumes. Given the higher import numbers this year, how likely is Washington to start reapplying pressure?

Not very, according to Neil Atkinson, director of research at Lloyd's List Intelligence.

"It's in the interests of the US to have a solid working relationship with Iran. The US is keen to ensure that ISIS forces are contained as much as possible, and Iran is indispensible," he says, referring to the Islamist fighters who in June took control of a large swathe of terrority in northern Iraq.

These insurgents had already bombed the Iraq-Turkey crude export pipeline to the point where it could not be repaired, with the result that Iraq has lost close to 300,000 b/d of crude export capacity since early March.

Atkinson believes the possibility of a deal on the nuclear program during the extension period is high but unlikely until after the November 4 mid-term elections in the US.

So, even if a comprehensive deal is struck in November, "it's not as if Iranian oil is going to start flooding onto the market," he says, pointing out that there would be an administrative time lag between any agreement and its coming into force.

"We might not see the biggest impact until the second quarter of 2015, when the largest volumes might start appearing," he says.

The new November 24 deadline for a comprehensive nuclear pact has implications for OPEC's next meeting, which is scheduled for November 27.

The oil producer group has no real system in place for managing production formally. It has a 30 million b/d output ceiling that came into force at the beginning of 2012 but no individual country quotas. However, disruptions -- mainly in in Libya and Iraq -- and the big drop in Iranian volumes because of the sanctions have kept overall production down.

OPEC's recent meetings, therefore, have been underwhelming in terms of thrashing out production agreements. But that may be about to change.

Next article: Big Asian buyers slash Iranian oil imports

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