Opportunity Crudes

Crude uncertainty.


On Oct. 13, US President Donald Trump announced that he would not recertify that Iran fulfilling its obligations under 2015 nuclear deal with the US and its allies. Saying that Iran was not adhering to the "spirit" of the deal, the president said that he would direct his administration "to work closely with Congress to address the deal's many serious flaws," promising that "the agreement will be terminated" if that process does not yield results. The president stopped short, however, of actually replacing sanctions on Iran, and many experts are still skeptical that new sanctions are really a possibility. Other signatories to the deal—the UK, France, Germany, the EU, Russia and China—have meanwhile indicated that they may not follow Mr. Trump's lead, but buyers of Iranian crude are nevertheless making appropriate preparations.

Even before Mr. Trump's Oct. 13 announcement, some sources said that they were considering reducing the volume of Iranian crude they buy under term contracts, while one source—with a North Asian refiner—said companies might seek more protective force majeure clauses, of the sort that were the norm before the sanctions were removed. One source, a condensate trader in South Korea, said that even if sanctions never emerge, the perceived threat would make useful leverage. "I can't see any drastic supply disruptions next year…but such uncertainties could be used as a good bargaining tool for lower prices on 2018 term deals," he said. "I think many buyers would demand a risk discount." Some added, however, that refineries particularly geared toward processing Iranian crude might struggle to find suitable alternatives. "In the event sanctions are re-imposed, South Korean refiners could face difficulties," said Yonghun Jung, an adjunct at the energy systems department of Ajou Univ. in South Korea.

Iran's oil production hit 3.83MM b/d in Aug, up from 2.8MM b/d in 2015 when sanctions were still in force. But sources said that a sharp reduction in Iranian oil exports would probably not be too great a loss, considering the ready availability of other crudes and potential for the US to increase exports. Some market players were relieved that new sanctions were not (yet) placed on Tehran, meaning refiners could continue to buy Iranian crude; however, other players noted that the uncertainty going forward could keep a lid over prices. Finally, a lack of dollar clearing—if the sanction resumes—would create a major headache for the global banking system. The oil market volatility is expected to further magnify, particularly next year, as OPEC/NOPEC producers are still trying to sort out another production cut and even deepen the reduction level after the current deadline on Mar. 31, 2018. (Oct 9, 13)

Source: Worldwide Refining Business Digest Weekly.e, October 16, 2017.


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