Iran hoarding up to 38m barrels on supertankers

Significance: According to a number of sources, Iran’s offshore storage operation is spiralling, growing from around nine very large crude carriers (VLCCs) at the end of March to perhaps as many as 19—in addition to smaller tankers—late this week, suggesting it might be having problems in marketing its increasingly heavy and sulphuric output.
Implications The apparently exploding floating storage operation is officially being blamed on the current season, full of refinery turnarounds globally, although it demonstrates Iran’s growing vulnerability as fewer and fewer refiners can process its increasingly dominant heavy and sulphuric blends, while international political pressure is being used to persuade more and more buyers to desist from trading with Iran. Still, the politics of the situation should not be overstated at this point, with clear market movements underpinning the logic of Iran’s operations.
Outlook Iran is likely to wait for the refinery turnaround season to pass, yet it shows that—although the political implications should not be overstated—it is becoming increasingly vulnerable to market fluctuations, something which at some point might naturally be used against it to a certain degree.

Ballooning Storage
According to a Bloomberg report from earlier this week (12 April), Iran was keeping at least nine very large crude carriers (VLCCs) supertankers idling in the Gulf, the Gulf of Oman, and the Red Sea, in addition to a smaller number of Suezmax tankers. Given that VLCCs normally carry around 2 million barrels of crude each and Suezmax tankers about 1 million barrels of crude, Bloomberg—on talking to traders—found it safe to assume that at least 18 million barrels of Iranian crude was being kept in floating storage, most of which vessels are owned by the National Iranian Tanker Company (NITC). The trader information was backed up by satellite imagery showing the tankers sitting deep in the water, apparently heavily laden.

Over the past few days further news has come in about Iran’s storage operation expanding rapidly, with Reuters yesterday quoting trader estimates of around 19 VLCCs and one Suezmax being engaged in the operation—potentially putting Iran’s current floating storage levels at 39 million barrels—and breaking the 2008 record when, at the peak of another floating storage operation, Iran was engaging 15 VLCCs. The build-up is unlikely to have taken place over just four to five days, with one trading source telling Reuters that Iran was likely to have had 12 VLCCs engaged in storage by the end of March—higher than the number quoted by Bloomberg. As this news has been broken by Bloomberg, increasing investigation will be made by traders, shippers, and analysts to add up exactly how many ships are being chartered by Iran and idling in storage, with further adjustments to the numbers to be expected over the coming days.

In 2008, for a period extending over several months, Iran ran a large and growing offshore storage operation, to some extent explained by normal consumption fluctuations in the refining industry, but likely to have been exacerbated by the halting of crude purchases from Iran by one of the main buyers of its most heavy and sulphuric crude at that time, India’s Reliance. Iran took some time to accommodate this change in purchasing patterns, and this led to delays in its marketing. When it finally managed to sell off the—by then quite large—floating inventory, it found itself in the somewhat problematic position of risking weakening the heavier crudes market given the volume it needed to shift. The storage operation itself racked up major costs, since a significant proportion of the supertankers were chartered from international shippers, and the scale of the operation led to freight rates rising more than 200% in less than three months, according to Bloomberg.

Outlook and Implications:  Exposing Weakness

Iran’s crude production has become increasingly heavy and sour—sulphuric—over recent decades, with very heavy and sour grades now making up a significant part of its output, while its ageing domestic refineries are still largely unable to handle such grades. That has led to a situation where Iran has to export more of its cheaper crude, while it refines some of its better crude at home and sells the refined products domestically at highly subsidised rates. The preponderance of increasingly heavy and sour crudes among its exports have raised even further challenges, however, as only a limited number of refineries are geared up to handle those types of crude. The more limited amount of clients can easily become a problem for the National Iranian Oil Company (NIOC)’s marketing operations, especially during the seasonal refinery turnarounds that often occur after the northern hemisphere winter season.

Over the past few years Iran has also experienced increasing political risk with regard to this weakness, as more and more large-scale refiners come under pressure from the United States to stop buying Iranian crude—especially in cases where they have also been large-scale sellers of refined products back to the Islamic Republic. While cutting Iran off from the crude markets is beyond the scope of international sanctions currently under discussion over Iran’s controversial nuclear programme (and on the whole remain highly unlikely even over the longer term), this Iranian marketing weakness exposes it to the danger of politically motivated market manipulation from the U.S. side, a fact over which the Iranians seem quite concerned. Given that a part of the massive 2008 storage operation was caused by one or more significant heavy and sour crude buyers falling away, it could be quite interesting to assess which—if any—refiners have recently stopped buying Iranian crude and whether this to some extent can explain the large build-up.

Only So Far
Heavy crude also accounts for a growing proportion of the output from other Gulf states such as Kuwait and Saudi Arabia and, as political pressure on refiners to desist from Iranian business intensifies, buying from Iran’s neighbours might look to be an increasingly attractive solution. Ultimately, however, the balance will be regulated by OPEC, making sure that Saudi and Kuwaiti crude exports do not edge Iranian output out of the market. This will effectively put a stop to any U.S. political hopes of making Iran unable to find buyers for its heavy and sour volumes of its crude. Nonetheless, for Iran some damage is already done, bearing in mind the cost of maintaining such a large storage operation and the negative impact on the price of the relevant crude grades when they eventually hit the market.

Iran’s increasing market vulnerability can only be used for political pressure to some extent, but exposes Iran to a significant marketing challenge regardless. Its own programme of expanding its domestic refining capacities is lagging, and it is struggling to access more advanced refining technologies that will enable it to build effective heavy and sour oil refineries. Hence long-term domestic policy choices and deficits ensure that it will remain the Gulf producer most exposed to heavy crude market fluctuations compared to its neighbours, and that periodic political pressure will add even more costs to its marketing operations, money that would be sorely needed domestically.

About the author:  Samuel Ciszuk’s is IHS Global Insight’s Middle East Energy analyst