The international oil market has begun to turn away from Iranian oil, with key Asian customers exploring alternative sources of supply.
Japan, which sources 10% of its crude imports from Iran, is considering alternative supply sources and may cut back orders in a bid to secure an exemption from the sanctions imposed in respect of Iran’s central bank by the US. China, which at 500,000 bpd is Iran’s largest customer jointly with the EU, has already cuts its orders from the Islamic Republic by half for January.
The EU is also likely to begin implementing an embargo in Iranian oil imports from the end of the month, though the fragility of Eurozone economies is likely to prompt diplomats to implement measures gradually to avoid supply shocks.
Iran has so far been insouciant about an EU ban, expecting to sell to Asian markets without suffering too heavy a discount.
The UAE may be in a position to gain from a protracted threat to Arabian oil exports via the Strait of Hormuz. The 1.5 million barrels per day Habshan–Fujairah oil pipeline has already grown in strategic importance in advance of its completion this year, and the Fujairah government has injected cash into an oil storage project. The pipeline is dues to move Abu Dhabi’s onshore oil from the fields run by the ADCO joint venture to the expanding Fujairah terminal.
However, Bloomberg reports that the $3.3. billion pipeline – which was due to be completed in the fourth quarter of 2011 – will not now be ready to take Abu Dhabi’s export crude until at least April.
China Petroleum Engineering & Construction, a subsidiary of China’s state-backed CNPC, won the contract to construct the pipeline, which Bloomberg sources reveal currently has up to 270 outstanding construction defects.
Iran is treating the latest rounds of sanctions as “economic war” and has conducted war games in the Strait of Hormuz – a strategic chokepoint for marine oil transit – in a show of strength aimed at getting Western nations to back down from an increasingly aggressive foreign policy stance against the country in light of its nuclear enrichment program.
The moves may mean that Iran’s short-termist posturing in the Persian Gulf may have negative longer-term consequences for its position in the international oil market. Saudi Arabia has already benefitted from payment difficulties between India and Iran and says it stands ready to bridge the supply gap between Iran and its key Asian and European customers. Japan’s biggest refiner, JX Nippon Oil & Energy, is currently in talks with Saudi to replace Iranian crude shipments.
However, the country’s ministers are putting a brave face on the latest developments.
Foreign Minister Ali Akbar Salehi told a press conference on Thursday that “Iran, with divine assistance, has always been ready to counter such hostile actions and we are not concerned at all about the sanctions.” Salehi revealed that Iran would conduct further war games in the Strait in February, without giving details.
Britain and the USA have made commitments to keeping the Strait open, and Iran would be unlikely to resist the naval power of the US fifth fleet, based in Bahrain, and a combined international naval presence located nearby as part of an effort to eliminate piracy in the region’s waters.
The International Energy Agency is preparing to co-ordinate the release of up to 14 million barrels per day (bpd) of government-owned oil stored in the United States, Europe, Japan and other importers, should the Strait be closed. The strategic release could replace most of the 17 million bpd of oil from the Persian Gulf that would be subject to an Iranian blockade, with senior IEA executives telling Reuters on Thursday that the release could be maintained for a month.
Meanwhile, oil traders have not fully bought into the heated rhetoric surrounding the issue of a blockade. Brent is up $7 a barrel since the US introduced its latest round of sanctions against the Islamic Republic, but futures prices have not shown the spike required to denote that oil markets are pricing in serious disruptions to global supplies.
“Any rallies we are seeing on the news is purely day trading, and it may reverse just as quickly as it rallies,” Philip Wiper from oil brokerage PVM told Reuters.
While Iran has labored under one form of sanctions or another since the birth of the Islamic Republic in 1979, the latest rounds of sanctions have hit the country’s economy hard, with the rial collapsing in value against a basket of international currencies, weakening the buying power of Iranians dramatically over last two months.
