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Iran Is Expected To Sell Stored Crudes At A Discount.

Increasingly hard-pressed to find buyers for its crudes, Iran has been routinely switching off satellite tracking systems on its sea-bound oil tankers for several weeks in a cat-and-mouse game with Western powers seeking to enforce sanctions on its exports. The unusual tactic began in early April and now affects more than a quarter of Iran's tanker fleet. Soon Iran will have to offer big discounts to sell the rising volume of crudes floating at sea. The move will reverse an upward trend for paper crudes which Riyadh and other OPEC moderates say is a threat to the global economy.

The move by the state-controlled National Iranian Oil Tanker Co. (NITC), a violation of maritime law, is only modestly effective in cloaking 1,000-foot-long tankers as they ply the oceans in search of open ports and willing buyers. It under-scores Iran's precarious position as it faces ever-tighter Western restrictions on its oil income, which provides the bulk of its foreign currency revenue.

Hobbled by sanctions against its banks - notably including Bank Markazi - and a growing international boycott of its petroleum industry, Iran already is seeing its revenue sag while its oil sits in storage depots and floats in tankers with no-where to go. Tehran's worsening prospects were partly behind a hardening of the Western powers' stand at nuclear talks held Baghdad recently.

US Treasury Department Under-Secretary for Terrorism & Financial Intelligence David Cohen already said before the Baghdad talks began on May 23 that Tehran could no longer maintain a hard position. He noted: "The value of their currency, the rial, has dropped like a rock. That has had a significant impact on Iran's ability to pay for materials for the nuclear programme, and more broadly, it puts pressure on the leadership".

One key impact of recent sanctions has been to choke off shippers' access to maritime insurance, nearly all of which is under-written in Europe. That has made Iran ever more dependent on its own fleet of 39 tankers, including 25 VLCCs and ULCCs. Those super-tankers face mounting obstacles.

After coming under pressure from the US, the ship classification society Lloyd's Register in late April said it would close its office in Iran and stop certifying the safety of Iran's super-tankers. Also under US pressure, in late 2011 another leading classification society, Det Norske Veritas of Norway, ended its relationship with Iran.

The certification is needed by ships seeking entry at most of the world's ports.

In its Monthly Oil Market Report, the IEA on May 11 said Iran's crude oil production was still relatively high, at 3.3m b/d in April, down slightly from last year. But the agency said much of Iran's un-sold production was ending up in onshore and floating storage.

The IEA said estimates of Iranian crude oil added to floating storage in March and April had ranged from 450,000 to 800,000 b/d. It noted that an additional 20m to 25m barrels had been added to onshore storage facilities in recent months.

While countries such as Turkey and South Africa appear to have ramped up crude oil imports from Iran ahead of the July 1 sanctions deadline, some of Iran's biggest customers, including Japan and South Korea, have been gradually reducing Iranian crude imports. Turkish oil refiner Tupras has cut its purchase of Iranian crude by 20%.

Europe already has cut its imports from Iran to less than half of its earlier level of 700,000 b/d. With the EU embargo decision having been total, none of the remaining crude usually bound for Europe will reach that market by Jul 1.

In addition, India has reduced its oil purchases from Iran, which in 2011 covered 10% of that vast country's crude oil consumption. During her visit to New Delhi earlier in May, US Secretary of State Hillary Rodham Clinton pressed India to further reduce its oil imports from Iran.

The other 12 OPEC member-states are filling in the gap, with Saudi Aramco's crude oil production in May remaining above 10m b/d, in April having averaged 10.1m b/d. Saudi leaders, notably including Petroleum & Mineral Resources Minister Ali al-Na'imi, have repeatedly stated in recent weeks that Riyadh was prepared alone to fill the gap even if Iranian crude oil exports stopped. And Riyadh has been warning that the speculation-driven rise in the price of Dated Brent was posing serious dangers to the global economy.

The IEA report noted that, motivated in part by high world oil prices, OPEC crude supply in April had risen by 410,000 b/d - with Iraq, Nigeria and Libya providing about 85% of the increase. Iraq, in fact, in April began over-taking Iran as OPEC's second largest crude oil exporter next to Saudi Arabia.

Adding to the pressure from Riyadh, Saudi Aramco has been offering price discounts for its Arab Light crude oil, which is widely sold to Asia. That has encouraged large consumer countries such as China and India to shun Iranian oil.

The GPS tracking systems on Iran's sea-going tankers are required under international law as a safeguard against accidents and oil spills. Ship captains are only allowed to shut their GPS systems down in a handful of circumstances, such as when navigating in waters known to be frequented by pirates.

However, US officials have dismissed the NITC tactic as ineffective, noting that Western spy satellites and other surveillance systems are easily able track large ships on the open seas, even with GPS systems turned off. The practice, begun in early April and noted at the time by a Reuters report, has continued, reflecting a determined, if ultimately ineffective, effort to circumvent sanctions.

US officials, however, have acknowledged and some (if not all) of the marooned crude oil will eventually be sold, even at a large discount as oil traders seek to make a quick profit on cheaper supplies. But with global prices edging down in recent weeks, the state-owned National Iranian Oil Co. (NIOC) may have to settle for far less than the world market price.

Already weeks before the Baghdad talks were to begin on May 23, Iranian officials were pressing publicly for relief from Western and UNSC sanctions. But US and its Western allies at the Baghdad talks insisted on commitments from Iran to come clean about what they said were past secret research efforts by Iranian scientists to design nuclear war-heads.

The Associated Press on May 13 published a computer-generated drawing of what it said was an Iranian explosives containment chamber of the type needed for nuclear-arms-related tests. The UN nuclear watchdog, the International Atomic Energy Agency (IAEA), has long alleged that Iran used such a chamber to test detonators for potential use in a nuclear weapon. Iran has denied ever seeking to acquire atomic bombs. Meeting in Vienna on May 14-15, the IAEA asked Iran's representative Ali-Asghar Sultaniyeh for Tehran to allow UN inspectors to search and bring samples from this chamber at the Parchin military facilities near Tehran.

The AP report said the image was based on information supplied by an un-named individual who had seen the chamber at Parchin - which is about 30 km from Tehran. The AP did not provide additional details, saying that doing so could endanger the informant's life.

However, there is a serious power-struggle between the theocracy's Supreme Leader Ali Khamenei and President Mahmoud Ahmadi-Nejad, with the latter tied to a nationalist faction opposed to the very concept of theocracy in Iran. This rivalry now is getting more tense as Ahmadi-Nejad's group is opposed to the way Khamenei's ruling faction is controlling Iran's side of negotiations with the big powers over Tehran's nuclear and regional ambitions.

The two rivals now are blaming each other for having caused Iran's economic and political problems. And Khamenei's group has caused Ahmadi-Nejad's nationalists to be defeated in March and May 2012 parliamentary elections which will affect the latter in presidential polls generally due to take place in June 2013. Ahmadi-Nejad has been preparing his controversial chief of staff and in-law Esfandiar Rahim Masha'ie to run for president in 2013. Ahmadi-Nejad's second and final term ends in 2013.
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Comment:Iran Is Expected To Sell Stored Crudes At A Discount.
Publication:APS Review Oil Market Trends
Geographic Code:7IRAN
Date:May 28, 2012
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