European refiners have started sourcing alternatives to Iranian crude supplies well before new US sanctions on the OPEC producer are due to kick in later this year, according to oil traders.
• Demand for Urals, Basrah Light growing
• Refiners treading cautiously with Iranian oil
Demand for alternative medium-sour crude grades like Iraq’s Basrah Light and Russia’s Urals is already picking up in Europe, supported by additional buying as refiners in the region take advantage of strong margins.
Iran’s looming economic isolation has triggered a scramble in Europe to replace its medium-sour crude.
The region accounts for just under a third of Iran’s oil exports of around 2.4 million b/d. Oil prices have spiked above $80/b this month as Iran braces for tougher US sanctions due to come into effect in November.
“Already you have several vessels that have failed [subjects] for Iranian crude, and issues with insurance, shipping. So demand for alternatives is up. For Iraqi crude, KBT (Kurdish crude), Urals for sure, but also semi-sweet [crudes]. CPC Blend, Libya’s Es Sider, Russia’s Siberian Light is also seeing more demand.”
S&P Global Analytics expects up to 500,000 b/d of Iranian crude could be lost in the near-term once tighter US embargos are implemented after November 4.
“A lot of people don’t want to leave the nuclear deal, but at the end of the day it’s difficult to escape from the US economy,” the trader said.
Some refiners in Europe and Turkey are adapting quickly. In a sign of the shift, Turkey’s Tupras, one of the key buyers of Iranian crude, recently bought 4 million barrels of Basrah Light and 1 million barrels of Basrah Heavy in a tender.
Meanwhile, traders continuing to buy Iranian cargoes for European delivery face mounting challenges. Ship insurance and letters of credit are becoming harder to secure, said traders.
“We continue to see a lot of uncertainty on the ability of lifters to find banks, ships and insurance for it,” said a second crude oil trader active in the European market.
“At the end, some players have managed but there is a lot of uncertainty, [it is] not going to be on an automatic basis, one ship at a time, depending on exposure and, [this] will drag on,” he added.
Europe including Turkey is a key outlet for Iran’s oil, taking around 700,000 b/d, or a third, of Iranian crude exports. The region’s key buyers of Iranian crude are Turkey, France, Italy, Spain and Greece.
However, buyers risk alienating Iranian supply partners by sourcing alternative shipments of crude before US sanctions hit.
Iran’s Supreme Leader Ayatollah Ali Khamenei has demanded that European governments guarantee they will continue to buy Iranian crude oil.
“The Europeans must guarantee their purchase of oil from us as much as we need,” Khamenei was quoted as saying by the official government website late Wednesday.
The EU itself wants to negotiate sanctions waivers with the US for contracts signed by European companies with Iran before May 8, and is committed to helping Iran maintain its crude oil exports, EU Climate and Energy Commissioner Miguel Arias Canete said during a visit to Iran on the weekend.
The European Union announced a package of measures last week to shield European businesses from the impact of planned US sanctions on Iran. These include planned direct payments to Tehran to keep its oil flowing to European refiners.
Iran’s crude exports surged to 2.45 million b/d in April ahead of Trump’s announcement. The country’s exports to Asia rose to 1.81 million b/d last month, accounting for 67% of shipments. China is Iran’s largest customer for crude.