Iran will export a six-month low volume of fuel oil to East Asia in March as tighter Western sanctions against Tehran make payment difficult, while volumes will likely drop further as a European Union embargo approaches, traders said on Tuesday.
The world’s fifth-largest oil exporter is struggling to retain its top consumers as stricter sanctions and an embargo make it impossible to trade with the Islamic Republic, sapping an important lifeline for an increasingly isolated country.
Iran’s fuel oil shipments to East Asia in March are expected at 300,000-350,000 tons of straight-run 280-centistoke (cst), well below last year's monthly average of 550,000-600,0000, shipping reports show and Singapore-based fuel oil traders said.
Four 80,000-tonne lots are to land in Singapore and China, according to the sources.
Iranian exports made up nearly 8 percent of the 7-million ton monthly inflow into East Asia, the world's biggest market for the product, last year. A further decline may boost prices above the three-year highs they hovered around in the past four months and keep them at elevated levels.
“With the new sanctions, it will be nigh impossible, except maybe for the Chinese players,” a Singapore-based fuel oil trader said. “You can’t do anything if you can’t buy or sell the oil, especially for European and American traders who would have to adhere to their government's mandate.”
Already, Singapore-based Kuo Oil, one of the three companies blacklisted by the U.S. government for business links with Iran, has not been seen lifting any March-loading parcels, according to shipping reports.
The blacklist, which also includes Chinese state trader Zhenrong Zhuhai and the United Arab Emirates’ FAL Oil, bars them from receiving U.S. export licenses, U.S. Export Import Bank financing or loans over $10 million from U.S. financial institutions.
The blacklisted firms are among an exclusive group of six companies, including oil major Shell, European trader Vitol and Saudi trader Bakri, who regularly bought Iranian fuel oil in 2011.
Both FAL Oil and Bakri, mostly focused on the smaller regional markets, have already scaled down their Iranian imports last year due to difficulties in obtaining financing for the cargoes, company sources said.
Shell, which also buys Iranian crude, has said it will comply with “all applicable sanctions” in an emailed statement to Reuters.
Vitol has not made any public comment on the issue, but traders expect it to comply post July 1, simply because of the difficulty in continuing to trade with Iran.
Only Zhenrong, backed by the Chinese government, may be able to continue.
Asian refiners use fuel oil to produce diesel and jet fuel. Iranian grades are used for blending with other fuel oil that are thicker and contain more water.
The March arrivals include what traders said is likely to be Kuo’s last parcel, which is due to start loading on Wednesday. The others include two lots for Shell, with one for Feb. 29 loading and another in mid-March, and one for Tianbao for March 4 loading.
Record volumes of Iranian fuel oil flowed into East Asia in 2011, even though there were some sanctions already in place. The region typically gets two grades -- the National Iranian Oil Co’s (NIOC) straight-run 280-cst and the cracked 380-cst.
The high inflows, totaling 6.5-7 million tons for the year, or 550,000-600,000 tons per month, of the low-density, low-water variety were due to strong demand for such blend-stocks that peaked in the May-July period, according to Reuters data.
Imports peaked last year, with record-high volumes of 1.2 million tons landing in Singapore and China in June.
That was despite some Western banks already restricting financing trade that involved Iranian commodities, including oil, and issues relating to the use of the dollar, traders said.
“Most companies got around this by paying the Iranians in euros, via an agreed exchange rate,” a source familiar with the transactions said. “They also paid in cash terms through banks, mostly in Dubai, and in other third countries such as Singapore and China, and even Spain.”
Quite a few banks, especially those not headquartered in the United States or Europe were willing to deal with Iran because the sanctions were announced by the United States and not the United Nations.
At the time, buyers paid for the cargoes in cash, sometimes as much as $50-$60 million per cargo for a typical 80,000-ton straight-run 280-cst lot from the Bandar Mahshahr refinery.
Cash payment in full, via telegraphic transfer, is made to third-party banks within 30 days of receiving a Bill of Lading (BL), the sources said. The bill confirms that loading operations have completed and the ship has started sailing.
The dollar-euro exchange rate, usually around the loading period, was also pre-agreed, they added.
Demand is presently poor due to all-time high supplies for the next two months in a market that is more balanced in terms of cargo specifications.
“There is no dire need of Iranian-spec oil now, as the inflows, though extraordinarily heavy, are quite balanced,” another trader said. “But what happens after the sanctions kick in fully, and the market needs low-density, low-water, Iranian cargoes again?”