The increasing problems Iran is encountering in marketing its crude have placed a giant oil boom around the Gulf and Red Sea.
Weak sales feed glut in Gulf
The increasing problems Iran is encountering in marketing its crude have placed a giant oil boom around the Gulf and Red Sea. A regional oil glut, which also affects sales of crudes produced by Gulf states, was expected to dissipate at the end of the spring refinery maintenance season in the Far East. Instead, although it has shrunk by about 40 per cent from a peak of more than 50 million barrels of Gulf crude in floating storage at the end of May, the oversupply is persisting well into the summer.
Last week, there were still about 30 million barrels of oil in long-term storage in tankers in the Gulf and Red Sea, said Eugene Lindell, an analyst with JBC Energy in Vienna. The data come from satellite imagery pinpointing stationary supertankers riding low in the water, indicating they are fully laden. By contrast, all the tankers that were previously used as floating depots for excess crude pumped from North Sea fields have moved on.
Normally at this time of year, the vast majority of supertankers in the region of the Arabian peninsula would either be moored at jetties lifting cargo or on their way to supply Asian refineries with crude at the midpoint of the busy manufacturing region's summer driving and freight season. "One can definitely say that the whole Asian crude market is lagging behind Europe and North America by about two months," Mr Lindell said. "This is not something we saw in the past two years."
The 15 supertankers floating in the Gulf and two in the Red Sea are all Iranian. Saudi Arabia, the region's biggest oil producer and exporter, stores any crude output that it cannot immediately sell in a large network of onshore tanks, mostly in Europe, the US and South Korea. Saudi Aramco, the national oil company, also negotiated an oil-storage deal with Japan. In June, it secured an agreement to store up to 3.8 million barrels of oil at the Okinawa Oil Base, starting later this year.
Similarly, Abu Dhabi, which exports most of its crude output to Asia, has signed deals for oil storage in Japan and South Korea. This is partly because the emirate's Supreme Petroleum Council expects oil to be increasingly difficult to market in Asia. The Abu Dhabi National Oil Company (ADNOC) wants to set up a trading hub in the Far East to enhance its market access. But without such a network in place, ADNOC on Tuesday had to reduce its offering price for crude exports, just as prices for US and European crudes had risen to three-month highs. On Tuesday, the futures contract for next-month deliveries of the benchmark West Texas Intermediate crude approached US$83 a barrel on the New York Mercantile Exchange, its highest level since early May.
Oil traders and market analysts are watching closely to see whether Aramco follows ADNOC's lead in dropping prices. Iran's crude production, meanwhile, is becoming increasingly heavy and sour, which means it costs more than most competing Middle East crudes to refine. The government-owned National Iranian Oil Company (NIOC) has, however, been reluctant to drop prices, which is why so much Iranian crude is still floating in storage at sea.
Iran's oil exports to China, its biggest market, fell by 31.2 per cent to 66.1 million barrels in the first six months of this year from 96.4 million barrels in the same period last year. In June they rebounded enough to put Iran back in third place in supplying oil to China, up from eighth place in May. That suggests international sanctions against Iran are not an issue for Beijing when it comes to keeping the country's expanding economy supplied with oil. Rather, NIOC may also have dropped its prices.
A slippery question for all the region's oil exporters is how long the regional glut will last. That depends to a large extent on Russia, which is pumping record crude volumes and shipping more of it east. Most analysts do not expect Russia to be able to continue pumping up its crude output, but the world's biggest oil producer has already surprised nearly everyone. That includes OPEC officials, who last year pleaded with Moscow to help them limit global oil supplies.
Instead, Russia has become the main beneficiary of OPEC production cuts, Mr Lindell said. "You can get Middle East crude cheaper than Russian Urals [crude]," he added, illustrating the pressure that extra Russian barrels have placed on Gulf oil suppliers. The start-up of a new Russian pipeline to China next year was a certainty, Mr Lindell said, as its construction costs had already been paid in full.