Asia oil buyers see chance for United States waivers on Iran sanctions

Andrew Cummings
October 21, 2018

US crude inventories rose 6.49 million barrels last week, the Energy Information Administration reported, more than twice the rate forecast in a Bloomberg survey before the data was released.

Oil crept up on Thursday amid ongoing tensions over the death of a prominent Saudi journalist, with prices steadying after a big drop overnight due to a jump in USA crude stockpiles.

"EIA Weekly Petroleum Status Report was a complete shocker sending oil markets spiralling lower amidst some concerning development for oil bulls", said Stephen Innes, head of trading APAC at OANDA in Singapore.

But now, with the US's withdrawal from Iran's nuclear deal in May and re-imposition of sanctions against Iranian economy, the issue has come again under the spotlight as an approach to counter the new round of sanctions.

Iran's exports have not declined as much as predicted a couple of months ago and it is now clear they will not fall to zero, even after US sanctions are re-imposed next month.

Iran, the world's fifth biggest oil producer, exported about 2.5 million barrels of oil per day during the first half of 2018.

Hyundai Motors has reportedly ended its cooperation with the Iranian company Kerman Khodro in the Special Economic Zone, Arg-e Jadid after the United States president announced it will re-impose sanctions on Iran.

An unnamed source from the National Iranian Tanker Company (NITC) told Reuters on Friday that the firm had been shipping over 20 million barrels of oil to China's northeastern port of Dalian. The crisis over Khashoggi has threatened to undermine U.S. -Saudi ties around which Trump has staked much of his Middle East foreign policy strategy.

"We do intend to continue our engagement with the U.S. and other stakeholders to ensure our energy security and to protect our national interest", he stated.

In this context, the production cuts and embargo made an already tight market worse, sent oil prices surging, and produced a huge, short-term revenue windfall for Saudi Arabia and other oil producers.

For South Korea, there's a specific need for an ultra-light form of oil known as condensate from Iran's South Pars fields.

Rising prices also encouraged a wholesale switch away from the use of crude oil and heavy fuel oil in residential and commercial heating boilers as well as in power generation. Second, the amount of effective spare capacity is becoming limited and that leaves the market with a smaller cushion as more output is expected to fall from Iran and Venezuela, and who knows who else, maybe Libya or Nigeria or any other producer.

Oil prices and calendar spreads have softened significantly this month as traders became more confident about the availability of supplies towards the end of the year and into early 2019. However, it would have a significant psychological impact on the market, suppressing prices in the short run while also giving the Trump administration more leeway to take a harder line on countries buying oil from Iran.

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