Iran stores more oil at sea as trade pressure grows

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2012 Jan 11

Iran stores more oil at sea as trade pressure grows

The volume of Iranian crude oil stored at sea has risen to as much as 8mn barrels and is likely to increase further as the Islamic Republic struggles with sanctions and a seasonal refinery slowdown, shipping sources say.

Iran, Opec’s second-largest oil producer after Saudi Arabia with output of about 3.5mn bpd, faces tougher trade hurdles over its nuclear programme. European Union countries have agreed in principle to an Iranian oil import embargo in the latest Western efforts to step up heat on Tehran.

“A large part of its exports will be dislocated from Europe, and they will have to find new buyers or be replaced by other buyers,” said Samuel Ciszuk, a consultant at KBC Energy Economics.

“In any of those cases, Iran in sales price negotiations will have a very limited set of cards in its hands, and it’s a very plausible assumption that we will see an increase in floating storage.”

Storing crude temporarily on oil tankers at sea has been an effective means in recent years for Iran to hold cargoes until sales can be made while not interrupting oil field production.

Broker ICAP Shipping said the number of very large crude carrier tankers (VLCCs) storing Iranian crude has risen to four vessels from two in late December. A VLCC can store up to 2mn barrels of crude oil.

Another shipping source estimated Iran was using three VLCCs to store crude oil, while JP Morgan said Iran was storing around 4mn barrels of oil and that about 22mn barrels of floating VLCC capacity was readily available.

“If buyers disappear because of sanctions, it is likely (that) the first move by Iran would be to begin filling floating storage,” JP Morgan said this week.

Shipping sources said Iran was also using five VLCCs, up from around four in late December, to ferry its crude on shuttle runs to Red Sea terminals such as Sidi Kerir.

“If the EU sanctions are passed, it is likely the shuttling to the Red Sea will slow as their storage at Sidi Kerir will quickly fill up without EU buying,” said Simon Newman, head of tanker research at ICAP Shipping.

“Floating storage would likely increase as Iran cannot lower their production by much as they’ll lose pressure on their oil fields,” he added.

EU countries have proposed “grace periods” on existing contracts of one to 12 months to allow companies to find alternative suppliers before implementing an embargo.

Greece, which depends heavily on Iranian crude, is pushing for the longest delay, diplomats told Reuters.

China, the world’s top buyer of Iranian oil, is expected to be in a stronger position to negotiate better terms and has already cut imports from the Islamic Republic.

“Faced with a loss of traditional markets, Iran will likely also be aggressively looking for buyers, a process which is likely to entail heavy discounting or barter, and one that will tend to put downward pressures on oil prices,” JP Morgan said.

Much of Iran’s crude is heavy and has a high sulphur content, making it harder and more expensive for refiners to convert it into valued transport fuels.

“We are running into the normal seasonal floating storage when no one wants their more heavy, sour grades during shutdown season, so it should rise on that basis too,” a source said.

Iran’s floating storage peaked in June 2010, when it was estimated at over 40mn barrels of crude, the highest since 2008. It reached over 20mn barrels in early 2011 before falling again.

Shipping sources said the widening sanctions were likely to deter most international ship owners from engaging in deals in which Iran can hire tankers, compounding its logistic problems.

“I can’t see others being willing to charter in to them. Some companies simply won’t be able to without breaking sanctions, and those that can might jeopardise the future employment of their vessels if they’ve dealt with Iran,” a shipping source said.

Iran has threatened to block the vital Strait of Hormuz if sanctions imposed by the US and planned by the EU affect its exports.

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