After initial outrage, bluster and bravado, Iran appears to have come to terms with impending Western sanctions on the country’s oil and financial sector, to the point of saying they don’t think it will have any meaningful impact at all. Iran deems Western politicians as lacking the courage to stick with the ban in the face of a further rally in oil prices; inevitable, as they see it, if the West goes ahead with the ban.
So are they right to be so sanguine? Will Iran’s Asian customers take up the slack in buying production that the country cannot sell elsewhere? Indeed, is a price rally an inevitable and ultimately crushing certainty (for just about all industrialized/industrializing countries) if Iran’s oil is cut off from world markets?
We think not. A dramatic rise in prices is likely only in the event of outright aggression, either from Israel striking Iranian nuclear enrichment plants and eliciting Iranian retaliation, or Iranian aggressive action in the straights of Hormuz (passageway to a sizeable chunk of global seaborne oil shipments).
One benefit of the six-month delay the West put on the ban has been giving the world time to adjust to a market with constrained Iranian supply. Reuters’ Clyde Russell calculated in a recent column that China’s oil inventories may be growing by 670,000 barrels per day. Similarly, OPEC’s own monthly oil market report suggested Chinese stock building may be as high as 800,000 bpd, explaining why Chinese oil imports have been soaring while the economy has been slowing and all pointers are suggesting oil imports should slow, if not fall.
A significant part of the largest trade deficit China has ever seen in January was due to a rising oil import bill; if China is indeed importing as much as 800,000 bpd for stock, one can understand Iran may be reading that as robust demand.
US Oil Stocks
Meanwhile, US commercial oil stocks have hit record levels of 42 million barrels at Cushing, Ohio as falling demand (due to rising pump prices) and rising domestic production from less conventional sources combine to create something of a glut in the domestic market. Even this is dwarfed by America’s 700 million barrels of strategic reserve, some of which the president has apparently been discussing releasing with Britain’s Prime Minister David Cameron in talks this week designed to lower the oil price, although what effect this would have in the already well-supplied US market is less significant than if the extra supply was released in Europe or Asia.
The same article reported Iran’s belief that Saudi Arabia, touted by many as ready to ramp up production to meet any Iranian shortfall, is in fact already running close to capacity and unable to pump much more without damaging its long-term production efficiency. But a report in the FT states that although Saudi Arabia has been producing 9.8-10 million bpd, the highest level in 30 years, its domestic consumption plus exports are only 9.4-9.6 million bpd — the rest is said to be going into stock.
Apparently the Saudis own massive tank farms in the main European trading hub of Rotterdam, near its biggest Asian customers in Japan’s Okinawa, and in the Egyptian oil export port of Sidi Kerir. In total, Riyadh has permanent access to about 12 million barrels of storage, split among the three locations with further storage leased as required.
By the time sanctions begin to bite in the summer, the combination of strategic storage and marginally increased production Saudi Arabia can achieve, plausibly 1 million bpd or so, will mean the world may be able to cope with a supply disruption much better than they could at the end of 2011. Iran may be better advised to come back to the negotiating table and engage in an open dialogue rather than trust in the unique and irreplaceable nature of its oil exports.
Without them, the country would be on its knees within months and an already restless populace may weigh the prestige of owning a bomb as less valuable than a job or food on the plate.