Iran sanctions: shut-ins beckon as days tick down

Oil markets breathe easy ahead of US and EU sanctions deadlines

Iran's chief nuclear negotiator Saeed Jalili is almost out of time to prevent failed nuclear negotiations triggering a shut-in of Iranian oil producti
Iran's chief nuclear negotiator Saeed Jalili is almost out of time to prevent failed nuclear negotiations triggering a shut-in of Iranian oil producti

With just three days before the latest round of US sanctions against Iran’s oil industry take effect, and less than a week until an outright ban on the import of Iranian crude to the EU on 1 July, Brent remains at around $91 a barrel, indicating a belief on oil markets that any disruption to supply after 1 July has been priced in.

Most European refiners have already stopped shipments of Iranian crude ahead of an embargo of existing contracts due to start on 1 July, spurred by the withdrawal of insurance cover.

According to a Wall Street Journal report, organisations which provide safety certificates that allow tankers to berth at ports – including Det Norske Veritas, the Lloyd's Register and Bureau Veritas - have started to refuse sign off to Iranian tankers.

Italian oil firm Eni continues to take crude shipments as payment in kind for money owed by Iran, under an EU exemption.

Latest estimates obtained by Reuters put Iran’s exports at an average 1.2 - 1.3 million barrels per day, a million down from June last year, and in line with the upper end IEA estimates. GCC producers and increasing US production have filled the gap, incensing Tehran.

At current levels, Iran will soon need to shut in a significant portion of its oil production.

Asia Pacific Energy Consulting (APEC) released a report earlier this month claiming that Iran's condensate sales have also been hit by the sanctiosn regime. Shell, Dubai's ENOC, and South Korean refiners have already found other supplies, according to APEC. Iran produces around 430,000 bpd of condensates.

Iran’s main oil export hub at Kharg Island has stopped publishing loading schedules, and Iranian oil tankers have switched off their tracking devices.

According to reports by Reuters, fifteen of Iran’s VLCCs and five Suezmax tankers are acting as floating storage, adding 30 million barrels of inert Iranian crude to the onshore stockpile of million.

The US and EU are sticking to their sanctions plans, with the former extracting reductions in Iranian oil imports from other countries, including China, upon pain of being shut out from the US economy. Sanctions are being implemented in a bid to stop Iran progressing what the US and EU describe a military nuclear weapons program, which Tehran insists is for civilian purposes.

"We've seen China slowly but surely take actions," Clinton said recently. "I have to certify under American laws whether or not countries are reducing their purchases of crude oil from Iran and I was able to certify that India was, Japan was, South Korea was.”

"And we think, based on the latest data, that China is also moving in that direction," Clinton said.

Clinton’s announcement was undercut by shipping data for May, which shows China taking 524,000 barrels of Iranian a day, up 35% from April, after resolution of a payment dispute unrelated to sanctions. A Chinese official called the rise “fully reasonable and legitimate."

South Korea's imports from Iran totalled 3.963 million barrels in May, down from 6.553 million in May 2011. This year’s Iran imports are down over 15% from the same period in 2011.

Japan has passing a law allowing the government to backstop liabilities in the event that a tanker carrying Iranian crude to the country has an accident. Japan and China together are set to import around 620,000 bpd from Iran in July, according to data compiled by Reuters.

The initial thinking behind oil sanctions on Iran seemed to have been to push down the price of Iran’s crude by restricting the country’s market access, while keeping oil flow onto the market at steady levels to avoid supply shocks.

With a huge increase in supply from Gulf producers and a weakening demand picture in oil consuming countries which has pushed down prices at the pump, politicians in the EU and US have had room to take sanctions further, forcing Iran to hoard oil and face the prospect of production shut-ins and lost market share to Saudi Arabia.

Insurance has been the key to the effectiveness of EU sanctions, as 95% of marine insurance contracts to the oil shipping industry are made in London. EU Commissioner for Energy Gunter Oettinger said that no exemptions will be made before 1 July.

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