Walking the talk

When it comes to reducing prices and regulating supplies of crude, political leaders seem to produce more talk than action. During a Mar. 19 cabinet meeting, Saudi King Abdullah bin Abdul-Aziz Al Saud vowed to bring down the price of crude to “fair levels” sparking speculation of a policy change.

The front-month crude contract dropped 2% Mar. 20 on the New York Mercantile Exchange in reaction to the king’s remark, although the Saudi oil minister by then had reiterated the kingdom’s standing claim that there’s no need to produce more oil because there is no additional demand for the commodity.

Meanwhile, a record number of Saudi-owned Vela International Marine Ltd. very large crude carriers (VLCCs) were reported en route with crude cargoes to the US Gulf Coast—further proof, some said, that Saudi Arabia was serious about increasing supply and bringing down crude prices in the face of a pending European embargo of Iranian crude. After all, the prevailing price and export volumes would enable Saudi Arabia to fully fund its annual budget by the end of July.

Analysts at KBC Energy Economics, a division of KBC Advanced Technologies PLC, confirmed Vela booked in March “nearly a dozen VLCCs” to transport some 20 million bbl of Middle East crude to the US Gulf Coast. But the “obvious notion” that these shipments are related to the 325,000 b/d expansion of the Motiva Enterprises LLC refinery in Port Arthur, Tex., “seems to have been forgotten in a frenzy of headlines that the kingdom was boosting oil production in a heroic bid to bring down $120/bbl-plus oil prices,” they said. Motiva is a 50-50 joint venture of Shell Oil and Saudi Aramco, which is the sole supplier of crude to that refinery—the largest in the US and one of the top 10 in the world.

“Sanctions on Iran now offers some guarantees to Saudi Arabia that it does not have to fear a loss of volume, and at current volume even with a flat price drop to $55/bbl, Saudi Arabia would meet the budget,” said Olivier Jakob at Petromatrix in Zug, Switzerland. “Iran of course would then be hit with low volume and low prices and would start to be under significant pressure, which could also then translate in less Iranian support to Syria, keeping in mind that the removal of the current regime in Syria is a key short-term political objective of the kingdom.”

Embargo exemptions

Meanwhile, in separate action Mar. 19, the US granted Japan and 10 European countries exemptions from an Iranian oil trade embargo. “No doubt it’s election year in the US, but the gap between rhetoric and reality is becoming surreal—no more so than on the issue of Iranian sanctions,” said KBC analysts. Despite talking tough on the Iran issue, US President Barack Obama’s administration granted from US economic sanctions to Belgium, Czech Republic, France, Germany, Greece, Italy, Netherlands, Poland, Spain, UK, and Japan claiming they have “significantly reduced” purchases of oil from Iran. That means banks and other financial institutions in the excused countries will not be hit by penalties under US law for a renewable period of 180 days.

“This is a bit like giving someone a crowbar for not stealing,” said KBC analysts. “Meanwhile, European Union foreign ministers are expected to approve a decision to allow some insurance on Iranian oil shipments before the embargo starts on July 1, making it easier for the likes of Japan and South Korea to import Iranian crude, at least until the deadline.”

They reported, “China, India, Japan, and South Korea buy more than half of Iran’s oil exports of 2 million b/d. Although China and India have appeared more reluctant than Japan and South Korea to toe the US line, all appear to be reducing their imports of Iranian crude, and have recently been joined by Taiwan and South Africa.”

EU members agreed in January to embargo imports of Iranian crude in a move to discourage that country’s atomic program. But implementation of the band was delayed to July to give the biggest buyers time to secure other supplies. “As well as making it illegal to buy Iranian crude oil, the EU embargo bans European firms from transporting or insuring crude originating in Iran, wherever it is sold. The proposed exemption of insurance from the sanctions is currently only until July 1, although some media reports suggest that it may be, or could be, extended at the next meeting of EU foreign ministers in May,” KBC analysts said.

(Online Mar. 26, 2012; author's e-mail: samf@ogjonline.com)

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