Supply concerns replace Iran as top worry for oil markets

A feared price spike failed to materialise after Iran threatened on May 8 to reduce its pledge to the 2015 nuclear deal. Brent prices dipped below $70.50/barrel (Bt2,246.13/barrel), despite the move that adds to an already combustible Persian Gulf region where a fifth of the world’s seaborne crude is exported.
Tehran’s decision follows US President Donald Trump ending waivers for key customers of Iranian crude and guaranteeing the security of supplies through the Strait of Hormuz, the world’s busiest crude transit chokepoint. The sanctions clampdown is expected to reduce Iran’s exports of oil and condensate to 500,000 barrels a day (b/d) by the second half, down from 1.3 million b/d earlier this year.
Saudi Arabia, the UAE and Russia stand ready to make up for the lost barrels by potentially adding 970,000 b/d to supplies, according to S&P Global Platts Analytics. However, the growing number of potential geopolitical disruptions is a potential risk to supply. Platts Analytics expects OPEC’s spare capacity to fall by half to below 1 million b/d by the end of the year, leaving the group with little room to react should the situation in Venezuela, Libya or the Gulf deteriorate.
“This will make markets especially nervous given uncertainties in Libya and Venezuela, as well as an unsettling recent uptick in small-scale disruptions in Nigeria,” cautioned Paul Sheldon, geopolitical adviser at Platts Analytics.
Stocks are also looking tight. Platts Analytics forecasts total commercial oil stocks will fall by more than 400,000 b/d this year, with big drops expected in the fourth quarter leading to higher oil prices.
OPEC meets with its main allies led by Russia in late June in Vienna. By then a clearer picture of how tight the market could get later this year should emerge. Platts Analytics sees a chance of crude retracing back to $80/b by year end. Of course, failure to diffuse a trade war between the US and China, along with stronger than expected supply growth in the Permian could still dampen expectations.

Asia well-placed to replace Iranian oil
Meanwhile, Asian importers seem well-placed to make up for Iran’s lost barrels, despite grumbling about sanctions.
China was most vocal in its displeasure and categorically opposed the unilateral US action against Tehran. The world’s second-largest consumer of crude complained that its “cooperation with Iran is open, transparent, lawful and legitimate, and thus should be respected”.
South Korea, which has even more at stake given its alliance with the US, took a more conciliatory approach. Seoul said it plans to find ways to convince the US to consider extending the waivers.
However, Iran’s isolation shows the benefits for Asian customers maintaining a diversity of supply. Chinese refiners have been importing between 400,000 b/d and 700,000 b/d of Iranian crude, comprising a mix of medium and heavy grades. Iran mainly supplies medium and heavy grades, which are currently in tight supply and often available at discounted rates. It could get increasingly tricky to fill those volumes with grades from other suppliers at the right price.
Chinese refiners recently even tried a new medium and heavy grade from Brazil. Meanwhile, in India and Japan, refiners said they would aim to step up crude imports from countries such as Mexico, Iraq and the US to make up for any supply losses.
South Korea is also ready for the complete cut-off of Iranian crude and condensate supply from next month. The country’s refiners have already diversified their feedstock supply sources.
In a rare move, South Korea imported more than 1.6 million barrels of Ormen Lange and Snohvit condensate from Norway in the fourth quarter last year when Asia’s biggest ultra-light crude buyer completely stopped purchasing oil from Iran during September-December 2018, official government data showed.
South Korean refiners have also sharply increased purchases of US crude and condensate to make up for the decline in Iranian oil imports in recent quarters.
Seoul received close to 30 million barrels of US crude in Q1, up five-fold from the same period a year earlier, government data showed.
Besides the big importers, smaller Southeast Asian nations also look set to take US crude oil on a regular basis, with Vietnam and Indonesia making their very first purchase of light sweet WTI crude in recent weeks, signalling that the buyers are also keen to take advantage of favourable US-Asia arbitrage economics this year.

Contributed by Mriganka Jaipuriyar, head of news for Asia, S&P Global Platts.