Iranian Oil Crisis

Background to the Iranian oil crisis

EU sanctions

The EU oil sanctions anticipated to be announced on 23rd January will prohibit all EU countries from importing Iranian oil. The reality is that this will only impact Greece, Italy and Spain, the only EU members who import Iranian oil but it is widely expected there will be a carve out for these countries to perform pre existing contracts in order to allow a lead-in time of between 3 to 12 months. I estimate 6 months will be agreed.

Traditionally, refiners buy two thirds of their oil under long term contracts and the balance on the spot market. It is these long term contracts which will likely be subject to the carve out, with spot purchases ceasing immediately. Greece, Italy and Spain have no doubt won significant carrots in return for their agreement to play ball with their EU partners.

US Sanctions

The US oil sanctions work in a different way. These sanctions allow the US to sanction banks, refiners and traders worldwide who buy Iranian oil. It is not an offence for these non US entities to buy, supply, or be involved with the purchase ofIranian oil but the US can choose to cut these entities off from the US financial system.

Who currently buys Iranian oil?

Estimates are as follows:

China: 549,000 bpd

Greece, Italy and Spain: 450,000 bpd

Japan: 341,000 bpd

India: 330,000 bpd

South Korea: 244,000 bpd

Turkey 182,000 bpd

South Africa: 98,000 bpd

Taiwan: 33,000 bpd

Sri Lanka: 39,000 bpd

How will buyers of Iranian oil react?

China

China is the key to successful pressure on Iran. Will the US persuade China to reduce its dealings with Iran? Initial signs indicate that the Chinese are reducing exposure to Iranian oil but it could be that they are simply trying to push the price of Iranian oil as low as possible whilst paying temporary lip service to the US. In the meantime, Iran will build up its stocks - but when Iran is desperate, China may march back in. Financially, it makes complete sense for the Chinese to ultimately take as much Iranian oil as it can at a discount in order to fill up its strategic petroleum reserves. My assessment is that we will see a short term reduction in Chinese deals with Iran, but ultimately the Chinese will re-enter the market with gusto and take as much Iranian oil as it can, while it can, at rock bottom prices. The US is unlikely to exercise its right to punish China.

Beijing has cut its imports of Iranian crude by more than half for January, paying premiums for...