May 31, 2010 / 10:15 AM / 9 years ago

ANALYSIS - Pressure on Iran to cut crude prices as glut grows

SINGAPORE (Reuters) - Iran is under pressure to cut oil prices to win back Asian buyers who favour alternatives from the Gulf to Russia, even as it struggles to raise income with sanctionss limiting its ability to lift output from ageing fields.

Prices of crude from Iran, which exports around 40 percent of its 3.7 million barrels per day (bpd) production to Asia, are also under stress from bloated stockpiles on its tankers, as demand was hit by spring refinery maintenance, fear of sanctions and cuts in term requirements.

With little access to technology to optimise production from its oilfields, Iran is boosting revenue by increasing the price of some exports, Vienna-based consultancy JBC Energy said.

The world’s fifth-largest crude exporter narrowed the discounts for heavy grades Soroush and Norouz by up to $5 a barrel to a discount of $4-$6 to the Iran Heavy benchmark in the first half of this year versus 2009, Reuters data showed.

“Iran is expected to remain under pressure in terms of crude sales as we see a tendency for an oversupplied crude market throughout the year,” JBC Energy told Reuters.

Prices for other heavy grades such as Iranian Heavy and Forozan have also risen. Last year, prices for Iranian Heavy averaged 5 cents a barrel above Arab Medium, the first premium since 2002, and more than 20 cents above its 2008 average.

Buyers are questioning why Iranian crudes are priced above similar Saudi and Kuwaiti grades. An Asian buyer said Iranian Heavy, with a heavier bottom cut than Arab Medium, should be priced lower.

For a price chart on Soroush, Norouz, click

here

For a price chart on Iranian Light vs Arabian Light, click:

here

For a price chart on Iranian Heavy, click here

STIFF COMPETITION

Increasing complexity at Asian refineries allowed them to handle a wider variety of more competitively priced crudes from Russia, Brazil and Australia.

“It should be a time for them to lower their OSPs (official selling prices) to attract more buyers,” a second buyer said.

India’s top privately run refiner, Reliance Industries, has scooped up bargains such as Russian Urals and bought its first Pyrenees cargo from Australia after it dropped a contract to import around 100,000 bpd of crude from Iran for financial year 2010.

Imports from Japan are set to hit a 17-year low this year while shipments to China and South Korea have dropped in the first quarter.

Royal Dutch Shell and other oil firms are also taking less Iranian crude on poor economics and the difficulty of making financial transactions with Tehran, sources said.

SANCTIONS DETER SOME BUYERS, NOT CHINA

Buyers are getting more nervous when dealing with Iranian crude as sanctions against Tehran over its nuclear plan have made it more difficult to fund purchases, the second buyer said.

“It’s difficult to handle Iranian crude due to the political pressure,” he said. “The uncertainty itself is a kind of pressure. Nobody knows what kind of agreement will come out.”

Western powers, along with Russia and China, have drafted a fourth round of U.N. sanctions against Tehran for refusing to halt nuclear enrichment. Washington last week dismissed efforts by Brazil and Turkey to craft a nuclear fuel deal for Iran, saying Tehran must face new sanctions as soon as possible.

However, China likely reduced its imports due to seasonal and commercial reasons rather than political, said Kang Wu, senior adviser at FACTS Global Energy.

“A political decision has not been made yet (by the Chinese government). I don’t think China will reduce the amount quietly without making a political decision,” Kang Wu said, adding lower first-quarter imports may not reflect the full-year pattern.

Iran is the third-largest supplier of crude to China, after Saudi Arabia and Angola, providing more than 10 percent of imports last year.

“I won’t be surprised if the high floating stock influences Iranian prices and make it more favourable. China probably won’t hesitate to buy Iranian crude then,” Kang Wu added.

CONTANGO STRUCTURE

A steep contango structure — where forward prices are higher — and the use of its own tankers may ease some of the pressure on Iran to sharply cut prices.

“The end of refinery turnarounds will slow the rise in Iran’s floating storage but it will likely take a reduction in relative OSPs — especially with respect to the Saudi Aramco OSPs — to work off the excess,” PFC Energy said.

However, NIOC is unlikely to start a fire sale of its crude held offshore, if only to avoid depressing prices for its heavier crude further, the International Energy Agency said.

Ship brokerage E.A. Gibson estimated that 20 Very Large Crude Carriers were storing Iranian crude in the week of May 16, one more VLCC than the previous week. Most of the tankers belong to the National Iranian Tankers Co, which operates one of the largest fleet in the Middle East.

“We’re definitely seeing more crude going into floating storage by choice, rather than by default,” said Lawrence Eagles, head of commodities research at JPMorgan.

“If the oil is hard to sell for technical or political reasons, you’re going to need to make that more competitive.”

(Additional reporting by James Topham in TOKYO, Cho Meeyoung in SEOUL, Nidhi Verma in NEW DELHI and Luke Pachymuthu in DUBAI; Editing by Ramthan Hussain)

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