Iran Oil Sanctions Starting Risks Biggest OPEC Loss Since Libya War

Reports indicate that the Islamic Republic of Iran and the Republic of Zimbabwe will announce a major resource agreement. Pictured here are Presidents Mahmoud Ahmadinejad and Robert Mugabe during a April 2011 visit by the Southern African leader., a photo by Pan-African News Wire File Photos on Flickr.

Iran Oil Sanctions Starting Risks Biggest OPEC Loss Since Libya

By Ewa Krukowska - Jun 30, 2012 6:01 PM

A petrol station in central Tehran. Iran has halted its limited oil sales to France and Britain in retaliation for a phased EU ban on Iranian.
European Union sanctions on Iran entered into full force today after exemptions on some contracts and insurance ended, boosting crude prices and pressure on the Persian Gulf nation to halt its nuclear-enrichment program.

The reduction in Iranian exports may become the biggest supply disruption from a member of the Organization of Petroleum Exporting Countries since an armed rebellion all but halted pumping in Libya last year, according to the International Energy Agency. It also comes just as a strike by Norwegian workers is curbing flows from North Sea fields.

“We expect Brent oil prices to be supported by Iranian oil sanctions and potential loss of supplies from the North Sea,” Gordon Kwan, the head of regional energy research at Mirae Asset Securities based in Hong Kong, said in a June 28 report. “The imminent EU insurance ban on tankers carrying Iranian crude could drive up demand for Brent and Dubai crude.”

Brent futures fell below $90 a barrel on June 21 for the first time in 18 months as concern that Europe’s debt crisis would spread sapped the outlook for fuel use worldwide. Now, the Iran embargo and Norwegian strike are stoking speculation about a rebound in prices, according to analysts such as Kwan and Ole Hansen at Saxo Bank A/S. Brent for August settlement surged 7 percent on June 29 to close at $97.80 a barrel on the ICE Futures Europe exchange.

Unsold Barrels

Iran, the second-biggest producer in OPEC after Saudi Arabia, was producing about 3.3 million barrels a day in May. Full implementation of sanctions will remove about 1 million barrels a day during the second half of the year as buyers disappear and Iranian storage tanks become full, the Paris-based IEA forecast in a June 13 report.

Iran called on OPEC to convene an emergency meeting to address the group’s production in excess of its target of 30 million barrels a day, the state-run Mehr news agency reported yesterday, citing Oil Minister Rostam Qasemi. Disregard of the limit by some OPEC members “will negatively impact oil prices in the international market,” Qasemi said. The 12-member organization, which decided on June 14 to retain its daily ceiling of 30 million barrels, pumped about 1.6 million barrels more than that in May, according to data compiled by Bloomberg.

The EU decided in January to ban oil imports from Iran, offering a five-month phase-in period for existing contracts to let member states such as Greece find alternative supplies. An exemption on tanker insurance restrictions for the worldwide shipping industry also ran out today.

Nuclear Impasse

Foreign ministers from the 27-nation bloc decided on June 25 the exemptions shouldn’t be extended after talks between Iran and the world’s powers about the nuclear program failed to reach a breakthrough since they started in April. Iran denies that it is developing nuclear weapons.

“Our purpose is to persuade Iran to come and negotiate with us and to show by action the reassurance that we’re seeking,” the EU’s foreign policy chief, Catherine Ashton, told a news conference in Luxembourg after the ministers met. “We need, not just in the EU but across the world, to keep the pressure up.”

The EU ban on insurance for ships carrying Iranian oil affects 95 percent of the world’s tankers because they’re covered by the 13 members of the London-based International Group of P&I Clubs, which is adhering to the EU rule.

In an effort to retain an important Asian customer, Iran offered to supply oil to South Korea using its own tankers, a government official in Seoul said June 29, asking not to be identified because the matter is confidential.

Parallel Action

Complementing the European sanctions, a U.S. law enacted Dec. 31 cuts off international banks from the U.S. financial system if they settle oil trades with Iran. The U.S. rule gave importing nations, including China, India and Japan, until June 28 to demonstrate they had “significantly reduced” their purchases of Iranian oil in order to qualify for exemptions.

Oil and its derivatives account for nearly 80 percent of Iran’s exports and about half of government revenue, according to the U.S. Energy Information Administration, which estimates the country’s 2010 net oil export revenues at $73 billion.

Iran’s oil exports may “gradually” decline by 20 percent to 30 percent after sanctions start and amid field maintenance work, Deputy Oil Minister Ahmad Qalebani said on June 26.

Such acknowledgement hasn’t erased tensions over the sanctions. Iran warned it can strike any target in the Strait of Hormuz and Persian Gulf and will soon equip ships with missiles capable of firing more than 300 kilometers (186 miles), Mehr reported June 29, citing a commander of the Islamic Revolutionary Guards Corps. Tankers carrying about a fifth of globally traded oil exit the Gulf though the Hormuz chokepoint.

Iranian ‘Playground’

“The Strait of Hormuz and the Persian Gulf is Iran’s playground and no one else’s,” Admiral Ali Fadavi told Mehr. “Any issues related to the Strait of Hormuz will be a very big story that will have consequences on the price of oil.”

A survey of 42 analysts on June 28 showed that 16, or 38 percent of them, predicted crude futures will increase in the week starting tomorrow, citing the new sanctions. Among the remainder, 12 forecast little change in prices and 14 expected a decline.

“That is the wildcard, the Iranian situation,” Torbjoern Kjus, an oil analyst at DnB ASA, an Oslo-based bank, said by phone on June 29.

“Nobody can be totally certain how it’s really going to affect the market,” he said. “There’s probably been huge inventory builds in Iran, and this could pose a bearish effect for next year or the second half of this year if there is a resolution.”

To contact the reporter on this story: Ewa Krukowska in Brussels at ekrukowska@bloomberg.net

To contact the editor responsible for this story: Lars Paulsson at lpaulsson@bloomberg.net