Counting barrels of crude

Industry analysts lately have been counting barrels—barrels of refining capacity lost as plants shut down on both sides of the Atlantic; barrels of crude flowing into the US Midwest and their impact on prices for West Texas Intermediate; and barrels of supply that may be lost if the European Union activates its proposed embargo on Iran in 6 months or if Iran beats them to the punch by stopping shipments.

“The key question in all three cases is whether the changes are large enough to change our previous main medium-term conclusions; i.e. that refining margins will be under pressure through to the middle of decade, that sanctions have tended to just change trade flows and not affect revenues, and that US Midwest balances still look a bit heavy,” said Paul Horsnell, managing director of Commodities Research at Barclays Capital, London.

He said, “We still see medium-term refinery margins as being under pressure, and we still see Midwest balances as heavy, if not even heavier. However, the process of Iranian export barrel-counting suggests that, depending on the stance taken by a couple of key consumers, the mathematics of clearing all the barrels through the market might no longer add up.”

The International Monetary Fund recently projected the global price of oil could escalate $20-30/bbl if Iran were to block the Strait of Hormuz as it has threatened. But oil markets have mostly ignored Iranian rhetoric, with prices flat or down slightly in the recent weeks.

Stopping exports to Europe before the EU embargo officially begins in July “would move Iran from being a ‘victim’ to being an aggressor and would also provide justification” for the Cooperation Council for the Arab States of the Gulf countries to replace Iranian crude in that market, said Olivier Jakob at Petromatrix in Zug, Switzerland. “Hence we are not sure that Iran has a lot to gain politically from being proactive on sales restrictions to Europe.” If Iran tries to halt passage of oil tankers through the strait, Jacob said, “It should be relatively easy for the International Energy Agency to authorize a release of strategic stocks for any country that would be hurt.”

Jakob foresees no major changes in European supply and demand “because the oil demand destruction it is currently suffering from is greater than the amount of Iranian crude oil that it is importing.” Still, he said, “In the micro balances, it does not work that easily as the petrol stations around London still need to be supplied by someone, and the[bankrupt] Petroplus Holdings AG’s refining system was not running on Iranian crude oil. The crude oil molecules going into the Petroplus system were more expensive than those going into the Greek refineries, and that will remain a risk for the refineries of southern Europe that will have to go through a higher cost of input when replacing Iranian crude oil.”

It’s not just oil

Analysts in the Houston office of Raymond James & Associates Inc. reported pipeline infrastructure in the region could mitigate the impact of a Hormuz blockade by rerouting much of Middle East crude supplies away from the strait. But crude is not the only energy commodity that passes through those waters in massive amounts.

“The percentage of global liquefied natural gas supply passing through the strait actually exceeds that of oil,” they said. “Qatar is the world’s No. 1 producer of LNG, with a market share near 25%, and the UAE is also a player. Unlike oil, there is no practical way for LNG shipments from these two countries to bypass Hormuz. Thus, a blockade would instantly halt over a quarter of the global supply of LNG.”

Most of the LNG shipments out of the Persian Gulf go to Asian markets. Three of the top four purchasers of LNG from Qatar and the UAE are Japan, India, and South Korea. “These countries could receive a double economic hit, i.e., a disruption in oil as well as LNG imports,” said Raymond James analysts. Japan, the world’s third-largest economy and the No. 1 LNG importer, would be particularly impacted.” Japan is one of the few industrialized economies that still use significant quantities of oil for power generation. “If oil supply were temporarily disrupted, Japan would naturally need to buy more LNG to compensate, especially given the issues with its nuclear fleet following the Fukushima disaster. If both oil and LNG supply are disrupted, Japan would face a colossal problem, possibly having to resort to energy rationing,” Raymond James analysts said.

(Online Jan. 31, 2012; author's e-mail: samf@ogjonline.com)

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