The current rally in oil prices very much resembles the surge witnessed in February. As then, the cost of low quality, high sulphur crude is leading the charge as refiners, caught wrong footed by Iranian sanctions, scramble for supplies.
Five months ago refiners were surprised by the European Union’s decision to impose an embargo on Iranian oil exports from July 1. This time, they seem to have misjudged the impact of a ban on insurance for Iranian crude oil tankers.
The best indicator of the rush – as in the rally earlier this year – is the surge in the physical market in the relative price of Urals, the Russian benchmark, to Brent. Urals largely mirrors the quality of Iranian crude, so refiners often use it as an alternative.
The price of Urals on Thursday jumped to a hefty premium of 40 cents per barrel over Brent in the northwestern European market, up from a discount of as much as $1.60 per barrel in mid-June. The premium is closing in on the record levels seen in February. Indeed, this is only the second time Urals has traded at a premium to Brent in the past 10 years: the first time being January-February this year.
Oil traders and consultants who monitor Iranian crude oil production estimate the country’s oil exports will drop by around 400,000 barrels a day in July on top of the estimated 600,000 b/d Iran has already lost ahead of the EU embargo. The numbers are, however, tentative as Iran is playing a game of cat-and-mouse to hide the extent of its oil exports.
“I think that by the end of July Iran will be exporting around 1.1m b/d,” says a trading executive at a major oil company. Last year, Iran exported 2.1m b/d.
The loss of insurance for Iranian tankers has prompted some countries to stop buying the country’s oil, either permanently – as in the case of South Korea – or for a few weeks – as in the case of China and Japan. The net result has been a rush for crude oil of similar quality.
Saudi Arabia, which is already pumping at its highest rate in 30 years of about 10m b/d, is witnessing a “pull from refiners” this month, according to an industry official familiar with Saudi Arabia’s oil sector. And traders said that the surge in Urals valuations reflect higher demand for the Russian crude.
The realignment of supply sources will take another two to four weeks, as in the case of last February. After refiners establish new supply channels, the panic will subside and, with that, prices will most likely weaken.
Zawya
