Iran’s simmering tensions with the West are likely to pose new obstacles for the oil-exporting nation, as major importers fall in line with the United States in tightening financial sanctions.
On November 21, Iran’s banking sector was hit by new US restrictions following a report earlier in the month from the International Atomic Energy Agency that it was continuing to pursue a nuclear weapons development program. The United Kingdom and Canada backed the US move, implementing measures that make it increasingly complicated to finance transactions for Iranian crude oil.
The European Union also indicated last week that it may support the new sanctions, with France suggesting a ban on all Iranian oil imports throughout the 27-nation bloc. The EU is the second-largest market for Iranian crude and if it approves France’s proposition, Iran’s exports would drop by 880,000 barrels per day.
While this would provide a boost to EU benchmark Brent crude, it would also mean EU operators would have to spend time and money adapting their refining equipment for different grades of oil.
Faced with this possibility, Iran may have to turn to Asia to make up the deficit. The OPEC nation may have to discount prices to ensure its biggest market continues to import its produce despite the added financial complications imposed by tighter sanctions.
The US restrictions already in place have led to India sending its payments for Iranian oil through a Turkish bank. With Turkey looking likely to fall in line with new sanctions, India has begun discussions with Russian banks to ensure it can maintain its supply.
On November 22, Russia’s foreign ministry described the US sanctions as a “violation of international law”.
China accounted for 22% of Iran’s crude exports for the first half of 2011, making it the biggest market in the world. In the past, it has criticized Western nations for imposing unilateral sanctions on Iran that reach beyond United Nations Security Council resolutions.
However it has supported UN resolutions condemning Iran’s nuclear development program.
Despite publicly resisting the latest US and EU sanctions, China also stands to benefit from cheaper import rates as Iran is forced to discount its prices. Iran is the world’s third-largest exporter of crude and is heavily reliant on the income. In the first seven months of 2011, it earned $56 billion from exports, according to the United States Energy Department.
OPEC figures for the month of October show that Iran produced 3.6 million barrels per day, compared to daily averages of 2.58 million in 2010.
On November 19, Iran’s Oil Minister Rostam Qasemi told Al Jazeera that restrictions on national exports risked bringing about major problems for the global crude industry.
Iran controls the northern stretch of the strategic Strait of Hormuz, where transport routes for some 20% of the world’s oil supply bottleneck. If it blocked off the straight, it would cause severe interruptions for exports from Saudi Arabia, Iraq, Qatar, Kuwait and the United Arab Emirates.
Crude prices rose $1.58 Tuesday in New York to end trading on $99.79 per barrel, after tipping briefly over the $100-mark earlier in the day.
Violence in the Iranian capital Teheran contributed to the increase, as angry students stormed the British embassy in reaction to the new sanctions. Analysts say that while the West is not likely to issue a direct ban on Iranian crude, the potential for continuing violence in the country may keep prices high.
Key Statistics – World Oil Market (source: Organization for the Petroleum Exporting Countries, Nov 2011 Report)
- Global demand for oil in 2011 is expected to grow at 0.9 million barrels per day.
- For the month of October OPEC spot fixtures rose 5%, averaging 11.8 million barrels per day thanks to a rise in Asian demand for Middle Eastern crude.
- In October US commercial oil stocks decreased for the second straight month, falling to 9.8 million barrels per day.
- In 2012, OPEC crude demand is forecast to average 30 million barrels per day.