The decision by the US government not to extend sanctions wavers for eight countries importing crude oil from Iran could remove around 1.1 million b/d from the market, but Saudi Arabia and several allies can replace the lost barrels, according to Rystad Energy (OGJ Online, Apr. 22, 2019).
Rystad Energy forecasts that Iranian crude production will drop to 2.27 million b/d for this year’s second half, reaching this level by July, which equates to a drop of 430,000 b/d from current March levels.
The net effect for the oil market is bullish, as the market will lose more supply from Iran, mostly of medium-sour and heavy-sour quality.
“However, Saudi Arabia and several of its allies have more replacement barrels than what would be lost from Iranian exports in a worst-case scenario. This should limit the positive impact on crude prices,” says Bjornar Tonhaugen, Rystad Energy head of oil market research.
“Since October 2018, Saudi Arabia, Russia, the UAE, and Iraq have cut 1.3 million b/d, which is more than enough to compensate for the additional loss. However, realistic spare capacity will be cut significantly, reducing room for error in Libya, Nigeria, and Venezuela,” Tonhaugen added.
“In our new base case, we no longer expect India to buy Iranian oil after May 2019, and now only expect China and Turkey to continue purchasing Iranian cargoes. We lower our Iranian crude exports estimate from 900,000 b/d to 600,000 b/d from May 2019 onwards, allocating around 500,000 b/d of exports to China and the remainder to Turkey,” Tonhaugen remarked.
The density and sulfur content of the main crude grades exported by the “four cutters”—Saudi Arabia, the UAE, Iraq, and Russia—are of similar quality to Iran’s main export grades, Iranian Heavy and Iranian Light.
“Saudi Arabia, Russia, UAE, and Iraq will have no problem replacing Iran’s crude grades, such as Iranian Heavy, Iranian Light, and West Kharoon,” Tonhaugen said. “We believe that Saudi Arabia has ample capacity of Arab Light especially, which is a grade of similar quality to Iranian crudes, due to the current production cuts. Russian Urals and Iraq’s Basra Light is also comparable to Iranian crude quality, while UAE’s main export grades are somewhat lighter and sweeter than Iran’s.”
