Iranian sanctions and potential impact on oil market
With an expected drop in demand for oil this year and increase in non-OPEC supplies, the oil market is waiting anxiously to see how US-led Western sanctions against Iran will unfold after they complete full year in effect.
Since they came into force in the summer of last year, there was a trend of fluctuation between one month and another in the volume of Iranian exports, though the general trend seems to be going downward.
For instance, last March Iranian exports plunged by almost one quarter from the level achieved in the previous month, or February, when an estimated 810,000 barrels per day were believed to have been loaded for export against 1.1 million bpd in the month before.
However, this month was expected to witness a rebound to little over one million bpd according to shipping sources tracking movements of tankers, but again that volume represents a drop of 36 percent from a year on calculation, which indicates that whatever improvement in exports appears may not be sustainable.
It was ironic that December saw the highest level reaching 1.4 million bpd, which also indicates the fluctuation type of export trend. That could be attributed to various ways and means Tehran used to circumvent those sanctions.
Despite the resolve of the US and its European allies to continue with their sanctions program, the main consumers led by China and many other Asian importers were exempted or found ways as Japan did by providing its own insurance.
China took the unusual step of sending one of its own state-owned tankers called Yuan Yang Hu to Kharj Island in March to lift some Iranian oil. No wonder as Iran represents the fourth supplier of oil to energy-thirsty China, after Saudi Arabia, Angola and Russia.
In addition to exemptions agreed upon by the US administration and certain measures taken by some importers — like Japan using its own insurance system instead of the one belonging to the Europeans, or China reflagging some tankers — Tehran seems to be resorting to some of the tactics it used in the past like a floating storage that can be a source for selling to potential consumers at depressed prices. Currently, it is estimated there are ten big tankers with two million barrel crude oil capacity each, in addition to others with a smaller capacity. Last year, it was estimated that Iran had a floating storage of more than 30 million barrels.
The other tactic used is to use barter as an economic arrangement to buy for itself some of its needs against some crude cargo.
Ironically one of the biggest developing markets for Iranian barter deals is Iraq who a decade ago was invaded by the Bush administration with the hope of turning it into a base for change in the region.
On the other hand and in another form of ironies, Iraq is emerging as a leading oil exporter who not only managed to remove Iran from its position as OPEC’s second top exporter after Saudi Arabia, but is helping other producers within the organization calm the market so that there won’t be any shortage of supplies because of Iran’s reduced exports.
Last August Iraq replaced Iran as OPEC’s second top crude exporter, a move that could have greater implications not only for Iran but also for the entire oil industry had Iraq managed to put its feet on the road to achieve its huge potential.
It has drawn up an ambitious plan of raising its production capacity to 12 million by 2017, but given different reality on ground it has now scaled that to around or more and even the questionable 9 million bpd thanks to political instability and security worries.
That may be good news for the oil market and the prevailing price for the simple reason it has to do with supply and demand.
The more there are supplies the more the price will be prone to remain depressed.
However, with the generally weak economic situation around the world it could be a welcome development to have soft oil prices as well so as to help in reviving embattled world economies, especially in the euro zone and the Americas in particular.
So it seems the near and short term outlook for the oil market will be governed by regular adjustments by key players led by the Kingdom hoping to strike some kind of a balance in the mean time.
How long that will go on or when the foggy political horizon in the region gets clearer is hard to tell. In fact, it has always been like that — short term management — as too many factors continue to be beyond the control of both producers and consumers.