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Oil Market Dynamics Already Shifting, Ahead Of U.S Sanctions On Iran

Published 13-06-2018, 10:38 am

Skepticism was probably the most common response to President Trump’s decision last month to reinstate U.S. sanctions on the Iranian oil industry. While Secretary of State Mike Pompeo said that Iran would face some of the “strongest sanctions in history,” critics were wondering whether any European firms would abide by the American standards.

National security advisor John Bolton warned that secondary sanctions could be a possibility against companies that did not take America’s sanctions seriously, but this may have a been a threat that the Trump administration was hoping it would never need to honor. Now, a month later, it appears that big players in the oil industry are not only taking note of the sanctions, many oil industry firms are preparing to halt or significantly decrease purchases of Iranian oil.

Here’s a look at some of the significant moves and what this means for oil markets.

1. French oil company Total SA (NYSE:TOT) announced it would pull out of its deal to develop the South Pars 11 natural gas field with Chinese company CNPC and Petropars, a subsidiary of the National Iranian Oil Company (NIOC).

2. Lukoil (OTC:LUKOY), Russia’s second largest oil company, decided to halt plans to take a stake in an Iranian oil field. Though no contracts had been finalized, Lukoil had shown a great deal of interest in developing new oil assets in Iran.

3. Reliance Industries Ltd (NS:RELI), which owns the world’s largest refining complex in India, said it will no longer import Iranian oil. India is the second largest importer of Iranian oil, behind China.

4. Nayara Energy, another Indian oil refiner, announced that it has begun reducing its purchases of Iranian oil. Nayara (formerly known as Essar Oil) was recently purchased by the Russian oil company, Rosneft (MCX:ROSN). Nayara was one of the largest purchasers of Iranian oil in India.

5. European refiners including Italy’s ENI (MI:ENI) and Saras, Spain’s Repsol (MC:REP) and Cepsa, and Greece’s Hellenic Petroleum (AT:HEPr) all stated that they plan to stop purchasing Iranian crude oil by the time sanctions take effect.

6. Daelin, a Korean contractor, recently cancelled its $2 billion contract to refurbish and upgrade an Iranian refinery in Esfahan.

Right now, however, purchases of Iranian oil are surging. It is clear that this current surge is due to the imminent return of sanctions. Iran is making more oil available for purchase at lower prices and refiners are rushing to buy as much as they can before sanctions take effect. The final date set by the U.S. before sanctions start on international purchases of Iranian oil is November 4, 2018.

When it comes to development, the departure of larger foreign oil firms from Iran does leave more room for smaller firms willing to take the risk to move in. The Russian state-owned oil company Zarubezhneft has signed a deal with Dana Energy, an Iranian company, to develop two small oil fields in western Iran. The deal is for only $742 million, compared to the South Pars 11 deal, which was $4.8 billion. The smaller international firms—which will take on Iranian projects because they have little to no exposure to U.S. enforcement—can make up for the loss of some international business but not nearly all.

China, the largest purchaser of Iranian oil, is working to improve its relationship with Iran. It has no plans to halt purchases of Iranian oil, but the sanctions could interfere with even this relationship. Even though Iran can take some payment in yuan (just as Venezuela has agreed to do), it is still unclear how China will pay Iran while ensuring that Chinese banks do not run afoul of American sanctions.

Moreover, Iran needs riyals (or currency that can be exchanged for riyals) to continue paying its government employees amid massive inflation. Also, even though Chinese firms are positioning themselves to play even larger rolls in the Iranian economy, it is unlikely that China will be able to absorb all of the Iranian oil relinquished by Iran’s other customers. China still has long-term contracts with Saudi Arabian oil company Aramco and receives a great deal of oil through a direct pipeline from Russia.

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