Monday, November 26, 2012

Iran to voluntarily curb crude oil export

A couple of weeks ago the IEA announced that Iran's oil exports have spiked to 1.3 million barrels per day (mbpd) in October from 1 mbpd in the summer. The explanation seems to be increased purchases from Asia.
Reuters: - The IEA said Iranian oil output rose by around 70,000 barrels per day (bpd) to 2.7 million bpd in October [from 2.63 million barrels per day in September]. Iranian exports jumped to 1.3 million bpd from 1.0 million seen in the two previous months.

"China and South Korea appear to account for the lion's share of the increase in Iranian imports," the IEA said in its monthly report.

The jump in imports could have brought Iran an additional $900 million last month, according to Reuters calculations based on the price for its oil of $100 a barrel.
Iran has been able to rename and "re-flag" its cargo ships multiple times to get around the sanctions. Some cargoes exchange and blend crude directly from ship to ship off the coast of Malaysia - with non-Iranian ships then headed for destinations "unknown".

But as discussed earlier, China wants to develop a more reliable source of crude, which will be coming via a pipeline from Russia (see post). The Russian crude oil pipeline will open up a whole new market (ESPO) in the Sea of Japan. This is expected to reduce demand for Iranian crude.

Possibly in response to these dynamics, Iran all of a sudden announced today that it will cut exports back to the low levels of the summer: 1 mbpd in 2013 (vs. 1.3 mbpd from the latest IEA number).
FARS: - "Apparently, the government wants to decrease the 1392 [note that in the Solar Hijri calendar, year 1392 starts March 21, 2013] state budget's reliance on oil exports to one million barrels a day," member of the parliament's Budget Planning Commission Gholamreza Mesbahi Moqaddam told FNA on Monday.

He said that the parliament is not concerned about deficiency in the 1392 state budget due to the western oil sanctions for the country sees crude embargos as an opportunity to reduce or even cut the country's reliance on oil exports.
The official explanation of course is Iran's desire to reduce dependence on crude exports. It's a step in the right direction, but that's something the nation should have initiated years ago rather than during this crisis (see discussion). The announcement constitutes a change in direction and took some market participants by surprise. Also if production is reduced for a prolonged period, it may impair long-term output capacity. Brent futures however have not responded. Some traders are saying that this is a bluff in an attempt to boost oil prices or the market is simply well supplied even if this reduction in output is real.

Brent July 2013 contract (source: barchart)

What is true is that Iran has a limited storage capacity for excess oil, which may explain some of the need to cut output. Iranian TV reported big plans to build new storage capacity.
Reuters: - With exports down sharply and fewer oil tankers available to store the excess, Iran's Press TV reported on Sunday that Iran plans to build millions of barrels of additional storage facilities in the Gulf over the next few months.

"By the middle of the next year, nearly 8.1 million barrels will be added to the crude oil storage capacity of Iran," Press TV reported the managing director of the Iranian Offshore Oil Company (IOOC), Mahmoud Zirakchian-Zadeh, as saying.
These developments are important to watch going forward because crude oil and petrochemicals exports are Iran's lifeline to obtain hard currency. With its economy in distress, access to hard currency will be increasingly important in order to satisfy the population's most basic needs.
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