US move to abandon Iran deal seen tighten Middle East crude fundamentals

9 May, 2018

The US Trump Administration on Tuesday local time announced that the country pulled out of the Iranian nuclear deal signed in 2015. Market players were closely monitoring the impact on the market from the US decision. When US revives economic sanctions on Iran, crude exports from Iran is highly likely to be disrupted. In the short-term period, demand/supply fundamentals especially for medium/heavy grades would tighten since most of crude exports from Iran were medium/heavy grades led by Iranian Light and Iranian Heavy. Iranian Light has an API gravity of 33.5 degrees while Iranian Heavy has an API gravity of 29.5 degrees. But producers from the Organization of the Petroleum Exporting Countries (OPEC) other than Iran, such as Saudi Arabia, could boost production to cover supply shortfalls from Iran in the medium to long term period, so that demand/supply fundamentals for Middle Eastern crude grades would be balanced eventually, said some market sources.

Meanwhile, main end-users in Asia were sitting on the fence about how to cope with the situations. US has yet to unveil the contents on economic sanctions on Iran, which prevented those end-users from making next moves. Major five countries excluding US such as United Kingdom and France continued to adhere to the Iran deal. A number of Asian countries found it hard to conclude whether they would reduce crude imports from Iran voluntarily following the US move or they would keep imports, regarding the deal as still effective. “Any countries that would not follow the US move could receive retaliatory actions such as tariff hikes on trade aspects,” said a Chinese oil firm source.

A scenario that Iran would boost crude exports for Europe that supports the Iranian deal would not be necessarily realistic. “If Europe yields to pressure from US, there remains a possibility that Europe would abandon the deal,” said the above Chinese oil firm. In any case, if US revives sanctions on Iran, bank settlements and marine insurances would be inevitably affected, which would influence intakes of Iranian grades by countries. “One key is whether US moves to set upside ceilings of each country’s Iranian crude imports,” said a Japanese trading house source.

The US move to withdraw from the Iranian nuclear deal was likely to have significant impacts on demand/supply fundamentals for Middle Eastern condensates as well. State-owned National Iranian Oil Co (NIOC) exports 300,000 to 350,000 barrels per day (b/d) of South Pars to South Korea. A total of intakes by SK Energy, Hanwha Total Petrochemical and Hyundai Petrochemical reached nearly 10.00 mil barrels per month. The volumes account for close to 50% of the total production for South Pars. As US resumes economic sanctions on Iran and exports of South Pars are disrupted, demand/supply fundamentals for Middle Eastern condensates would be severely squeezed. Some market players believed that South Korean buyers would be forced to expand procurements of arbitrage condensates to secure volumes to a certain extent, considering that supplies for Qatari condensates led by Deodorized Field Condensate (D.F.C.) in the Middle East were limited.


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