Iran is reaching out to its old oil buyers and is ready to cut prices if Western sanctions against it are eased, promising a battle for market share in a world less hungry for oil than when sanctions were imposed.
New Iranian President Hassam Rouhani’s “charm offensive” at the United Nations last month, coupled with a historic phone call with U.S. President Barak Obama, revived market hopes that Iranian barrels could return with a vengeance if the diplomatic mood music translates into a breakthrough in the stand-off over Tehran’s disputed nuclear programm.
The Islamic republic’s crude exports decreased by more than 50% after the European Union and United States, which accuse Tehran of seeking nuclear weapons, tightened sanctions in mid-2012, cutting its budget revenues by at least $35 billion a year.
“The Iranians are calling around already saying let’s talk … You have to be careful, of course, but there is no law against talking,” said a high-level oil trader, whose company is among many that stopped buying Iran’s oil because of sanctions.
The West’s energy watchdog, the International Energy Agency (IEA), said this month that despite the first high-level talks between Iran and the United States since the 1979 Iranian revolution, few expected sanctions to be eased soon.
“Rather, most expect that turning the clock back on sanctions will be a drawn-out process based on tangible diplomatic progress with regard to the issues at hand, which many still view as a remote prospect,” the IEA said.
However, last week Iran issued its first tender in two years to import fertilizers, in what traders said could be a test ball for the easing of sanctions on funding import-export operations with the country.
It is also sending strong signals to oil markets about its pricing policies should it make headway in the nuclear talks with the West. The next round of talks with the U.N. nuclear agency is planned for next week.
“Given the new circumstances, a large number of traditional buyers of Iranian oil are making the preparations and providing the facilities for raising their oil purchase from Iran,” news agency Shana quoted National Iranian Oil Co.’s head of trading Mohsen Ghamsari as saying on Tuesday.
Only five countries — China, India,Japan, South Korea and Turkey — are still buying Iranian oil. But they are taking just 1-1.2 million barrels a day, about half what Iran shifted before the sanctions were imposed in 2012, when more than a dozen countries were buyers.
All EU countries have stopped purchases, while the United States hasn’t bought Iranian crude for almost two decades.
Several months before the EU imposed its embargo, executives from large Western companies and buyers of Iranian oil, such as Shell RDSa.L. and Total (TOTF.PA), said the move would lead to higher oil prices and EU consumers would be the main losers.
But benchmark Brent oil prices have barely changed in the past two years, hovering in the $90-$120 a barrel range despite the loss of Iranian barrels and supply disruptions from Iraq, Libya and Nigeria.
The reason behind stable prices was strong growth in oil output in the United States, which is soon to become the world leader. There was also a spike in Saudi output to an all-time high, weaker demand growth in Asia and a decline in demand in Europe.
According to the IEA, demand in developed European countries has fallen by 2 million bpd in the past five years.
“It’s a different market. It’s a market that has a greater degree of supply than the market they, Iranians, exited,” said a trader with an oil major, who used to buy Iranian oil.
Before the EU sanctions, traders said the most common debate in the market was whether China would swallow all or just part of the Iranian oil unwanted elsewhere.
But Beijing has played ball with the West and tried to cut imports from Iran.
Arch-rival Iraq, which overtook Iran as OPEC’s second-largest oil producer, said last week China was seeking to steeply raise Iraqi oil purchases.
Iran’s Ghamsari said Iran might have to set or accept lower prices to go back to the market.
“Naturally, a resupply of Iran’s crude oil on the world markets will result in oil price cuts. The current figures show that the demand for oil is 30 percent lower than in normal conditions,” he told Shana.
Big Saudi Shift
Pricing won’t just depend on whether Iran returns to the market, but how fast. Though its oilfields could reverse much of the production cuts within months, full recovery would take over a year.
Quality will also play an important role.
“If I’m allowed to buy again, I will jump on it straight away,” said a European refiner, who asked not to be named. “Europe is terribly short of sour, heavy crude; the only one available is Russia’s Urals, and it has become very expensive.”
Olivier Jakob at consultancy Petromatrix agrees that Europe’s struggling refiners will not hesitate long before buying Iranian crude oil, especially at cheaper prices.
Iranian oil competes with Russian and Iraqi grades of the same heavy, sour quality, which has become prized since the U.S. shale oil boom increased global supply of previously scarce light oil.
However, a trader with another major said a jump in Iraqi Basra and Kazakh supplies next year should saturate demand for heavy oil in Europe, leaving not much space for Iranian oil.
Much will also depend on whether Saudi Arabia will make room for its arch-rival’s oil and cut exports to prevent a steep fall in prices.
Saudi Arabia’s intelligence chief has said the kingdom will make a “major shift” in relations with the United States in protest at its perceived inaction over the Syrian civil war and its overtures to Iran, though it remains unclear how that might affect oil policies.