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Arab Unrest and Iran's Oil Sales

by THOMAS STROUSE in Washington, D.C.

05 Apr 2011 19:18Comments

Regional disorder presents timely opportunities, as leading Asian importers trim purchases.

opec.gif[ business/analysis ] Unrest in the Arab world continues to send jitters through world oil markets. With fears that turmoil could spread across the region adding a risk premium to oil prices, even the slightest hint of a small protest in a major oil producing country like Saudi Arabia is enough to jolt the market upward. Particularly since the fall of Egypt's Hosni Mubarak, it has become clear that no regime in the region is immune to instability.

Although popular protest led to the downfall of two Arab leaders in the span of a month earlier this year, unrest in Libya marked the first time that the region's oil output had been significantly affected. Saudi Arabia, with the world's largest spare production capacity, has demonstrated its willingness and ability to fill any supply gap, both in the short and long term. However, it remains unclear how long the Libyan supply disruption will last and there are also questions about the availability of the type of Libyan crude that needs to be replaced as a result of the disruption.

While it is an open question as to whether Iran's position in the region has been bolstered by the ouster and weakening of Arab leaders hostile toward the Islamic Republic, Tehran does stand to gain from a loss in the region's oil production, whether from Libya or elsewhere. Considering its inability to increase its own production, Iran is pursuing an oil strategy that seeks to maximize revenues through higher oil prices. Its approach to the Libyan supply outage is fairly indicative of its overall oil strategy, while also reflecting geopolitical factors that have an impact on the development of Iran's oil sector.

Iranian oil officials are taking the position that they do not support a coordinated move by OPEC to increase production, saying that they see no shortage in the market and that supply concerns are mostly "psychological." However, Iran's Deputy Oil Minister, Ahmad Ghalebani, said in late February that "demand for Iran's oil has increased."

Interestingly enough, the supply disruption in Libya does create an opportunity for Iran to help fill the supply gap, not by increasing production, but rather, by selling unsold cargoes of crude oil it has amassed in floating storage over the past year. Iran has habitually amassed cargoes of crude in tankers anchored in the Persian Gulf in recent years, with some also reportedly in the Mediterranean. Latest reports suggest that Iran currently has an estimated 20 to 25 million barrels in floating storage.

Although Iran's high-sulfur ("sour") crude does not easily replace Libya's low-sulfur ("sweet") crude, some refiners could find Iran's unsold oil in floating storage as a short-term fix to any ongoing supply disruption in the region. Demonstrating its intent to push some of this crude to the market, Iran began shifting some cargoes into the Mediterranean market soon after Libyan supply outages began in late February.

Before unrest in Libya brought the country's oil output to a near standstill, it was exporting between 1.3 and 1.5 million barrels per day (b/d). Around 85 percent of Libyan exports went to Europe, including 30 percent to Italy, with another 10 percent imported by China. Last year, Libya was the largest oil supplier to Italy, exporting it around 363,000 b/d. This represented roughly 23 percent of Italy's total oil imports. Iran was Italy's fourth largest supplier, accounting for 13 percent of Italy's imports. Italy imported around 208,000 b/d from Iran last year, an 80 percent increase from 2009.

While Italy represented a major growth market for Iranian crude oil in 2010, other key purchasers of Iranian oil continue to show signs that they are looking to reduce their dependence on the country as a major supplier. This is partly based on geopolitical calculations that Iran may not be the most secure source of supply in the future. It is also because Iran is unable to satisfy the expected increases in energy demand in rapidly growing markets such as China and India. In their search for reliable partners to enhance their energy security, it is expected that China and India will both continue to lessen their dependence on the Islamic Republic.

One reason why Iran has amassed substantial amounts of unsold cargoes of crude appears to be because of difficulties making financial transactions as a result of international sanctions. For the most part, this has come from reductions in imports from some of its largest purchasers, including China, India, and Japan. Iran's oil trade with all three, which accounts for more than half of Iran's oil sales, has been affected by the tightening grip of sanctions against Tehran. In January, China's two importers of Iranian crude froze their 2011 purchase contracts at 2010 levels; Indian refiners, after more than three months of wrangling, have still been unable to create a long-term payment mechanism to remunerate Iran for the oil it has been selling them; and Japan's imports of Iranian crude declined substantially in 2010, with annual contracts up for renewal this month potentially resulting in further reductions.

Japan imported around 355,000 b/d from Iran in 2010, a 16 percent reduction from 2009, when it imported 421,000 b/d. The reduction was largely offset by a significant increase in Japanese imports from Russia. For its part, China reduced its oil imports from Iran by 8 percent last year, importing 426,000 b/d, compared to 463,000 b/d in 2009. This is while China's total oil imports increased by 18 percent, with imports from all other major suppliers dramatically increasing for the year. Although Iran is still China's third largest oil supplier, China increased its imports by a combined 200,000 b/d from its two largest suppliers, Saudi Arabia and Angola.

While Iran looks for potential strategic advantages in the unrest facing a number of Arab regimes hostile to its interests, it also searches for opportunities related to its oil trade. With oil prices above $100 per barrel for the first time since 2008, Iran is set to reap sizable benefits, even as it seeks to fetch higher selling prices for the unsold crude it has in floating storage, as well. In addition to padding government coffers, a substantial increase in oil revenues could also help ease any impending pressure on the Iranian government with regard to the ambitious subsidy reform plan it embarked on in late 2010. As conflict in Libya and unrest throughout the region helps take eyes off of Tehran, Iran will be searching for openings in the market to compensate for any reductions in oil sales as a result of sanctions and other geopolitical factors.

Thomas Strouse, an analyst at Foreign Reports, covers the oil industry for Tehran Bureau.

Copyright © 2011 Tehran Bureau

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