FOR all the headlines over the threat to oil shipments from
Iran as Western sanctions ramp up, it seems the crude market is doing what it
does best: getting on with business.
That is to say both buyers and sellers are adapting to the
new realities and seeking to maximise their advantage while ensuring that
everybody gets the oil they need.
Take the Chinese for example.
They are the top buyers of Iranian crude, usually taking
about 20% of the Islamic republic’s exports, or some 550 000 barrels a day.
But this was cut by 285 000 barrels a day in January and
February, and according to sources the Chinese will extend the reductions for a
third month in March.
At the same time China’s refiners appear to be putting the
knife into Iran, presumably as they seek better terms, the nation’s political
leaders are saying the West should back off from Iran and that putting
sanctions on the oil trade isn’t the solution to the nuclear problem.
What this shows is that China is seeking to maximise its own
position in the situation. It cannot stop Europe and the United States from
trying to end Iran’s nuclear programme, but China can benefit from the process.
And it would be wrong to think the Chinese are alone in
this: virtually everybody in the physical oil markets is also trying to work
out how best to profit.
Record amounts of West African crudes will be shipped to
Asia in the first quarter, with estimates reaching 1.82 million barrels a day,
up from 2011’s average of 1.57 million.
Russia, the world’s top oil producer, is also eyeing selling
more oil in Asia, adding to its existing market for its Eastern Siberian
Pacific Ocean (ESPO) crude.
Indian refiners, the second-largest buyer of Iranian oil
last year at 341 000 barrels a day, are apparently happy to keep buying, but at
the same time making it clear the Iranians will have to keep their prices low
in order to get the business.
It’s also likely that Saudi Arabia is seeking to maximise
its position as the world’s top exporter, making extra cargoes available and
cutting the premium it charges Asian refiners over the benchmark Oman/Dubai
average for its March official selling price.
What this tells you that behind the drama of the news
headlines, the oil market is getting on with the job.
The main impact of the headlines seems to be in the paper
market, where oil futures have been rallying, with front-month Brent up 12%
since mid-December to trade near its highest level in six months.
What’s driving the oil price higher doesn’t appear to be
extra demand, with expectations that the International Energy Agency will this
week trim its demand growth forecast for 2012 to as little as 300 000 barrels a
day.
With Europe staring at recession, if not already there, a
slowly recovery in the United States and an easing of growth in Asia, it’s hard
to be bullish on the oil price in the short term based on fundamentals.
It’s also not hard to see the Iran premium remaining in the
oil price for months to come.
There doesn’t seem to be what could be a termed a
“circuit-breaker” on the horizon: in other words, all the main parties are
continuing along their present paths, resulting in escalating tensions.
The West seems determined to hurt Iran economically with
sanctions that make it difficult to pay for oil, while equally, the authorities
in Tehran seem determined to maintain their nuclear programme is for
electricity only, while vowing to continue its development.
If you look at the history of similar conflicts, there are a
variety of ways that the Iranian situation can reach end game.
The real problem for the oil market would be if tensions
erupted into full-scale war, with the Western powers and Israel attacking Iran,
and Iran doing its best to shut down the Strait of Hormuz, through which 20% of
the world’s oil passes.
The more likely scenario, for the time being, is that
matters escalate until the pain becomes too much for somebody to bear.
In practical terms, this could be the West backing down if
Iran manages to withhold its oil for long enough to cause economic agony in
what is, after all, an election year in the United States and France.
Alternatively, the sanctions and economic hardship in Iran
could result in its own internal conflicts coming to the fore in the form of
some sort of regime change, followed by a compromise with the West.
In all but the all-out war scenario, the physical oil market
will be able to fairly quickly adjust, in fact, there may even be too much
crude floating around as the Iranians will no doubt try to continue selling.
*Clyde Russell is a Reuters market analyst. The views
expressed are his own.