There was significant news this week that are pointing to oil going higher, especially with this morning’s reports that Sinopec has cut its Iran oil loadings by half for Nov and Tues that India’s two biggest refiners haven’t asked for any loadings from Iran for Nov deliveries. Iran deliveries by mid Nov could still be achieved if Iran loadings are done within the two weeks for China or four weeks for India. But the clock is ticking quickly, especially for China. This week’s news is significant as it points to both China and India(Iran’s two biggest oil markets) giving in and cutting Iran oil imports to a significant degree. If so, it points to US sanctions cutting Iran oil exports to ~1.7 mmb/d and certainly above our expected range of 1.0 to 1.5 mmb/d. A cut of ~1.7 mmb/d would also be well above market expectations. This is why WTI and Brent oil prices are strong this week and expected to be stronger unless we see an abrupt change. Especially since the expectation has been that China wouldn’t be cutting Iran oil imports, rather they would maintain but also agree to not increase Iran oil imports. We should note that the impact of increased oil sanctions should ease a bit around year end as oil demand is seasonally lower every winter than in the fall and summer. The IEA forecasts Q1/19 oil demand will be 1 mmb/d lower than Q4/18. The other warning is that we still see the setup for an oil price spike in Q2/19 or Q3/19 once oil demand seasonally increases as long as Iran and Venezuela sanctions remain in place.
Iran exports pre US sanctions were 2.4 mmb/d of crude oil and 0.3 mmb/d of condensate. Oil data varies each month, but pre US sanctions, the monthly Iran oil exports were (all figures are approximate) China 0.7 mmb/d, India 0.7 mmb/d, Europe 0.6 mmb/d, South Korea 0.25 mmb/d and Japan 0.15 mmb/d. A good example of the monthly variances is Japan, we used an average of ~150,000 b/d but there have been months ~50,000 b/d and over 200, 000 b/d.
Europe has always been assumed to cut to zero. Our June 10, 2018 Energy Tidbits noted the reports that week that European refiners were early to start to wind down Iranian oil imports. We have not seen any reports to the contrary.
Japan is now reportedly “temporarily” cutting Iranian oil loadings to zero. Japan is reportedly still trying to get waivers from the US sanctions. However, it has not done so to date and is therefore seeking oil from other suppliers. On Sept 20, Reuters reported [LINK] “Japanese oil refiners have temporarily halted Iranian oil loadings ahead of U.S. sanctions and are buying alternatives as it remains unclear whether Japan will receive an exemption, the head of the country’s refinery association said on Thursday.” Japan has even committed to import oil from Yemen for the first time in 3 years to help replace the Iranian oil.
South Korea has cut Iranian crude oil imports to zero. On Sept 23, Shana (news agency for Iran’s oil ministry) reported [LINK] “An official with the Iranian Ministry of Petroleum says South Korea had completely stopped purchasing oil from Iran over the course of the past three months. Kasra Nouri, director of the Iranian Ministry of Petroleum’s Public Relations, said, “It is nearly three months that South Korea has stopped buying oil from Iran.” According to Mr. Nouri, South Korea was the first country to completely halt its oil purchases from Iran following Washington’s pullout of the nuclear deal Tehran stuck with 6 world powers back in 2015”.
India, expectations are now moving to see significant reduction in imports. India has reportedly been trying hard to get exemptions from the US sanctions so it can avoid cutting Iran oil imports especially with its strengthening commercial relationship with Iran. On Wed, Bloomberg [LINK] wrote “India Is Cutting Imports of Iranian Oil to Zero in November. Biggest Indian refiners haven’t asked for November oil”. We should keep in mind that it is a short voyage time for Iranian oil tankers to get to India. Its only about 12 days for oil tankers to get to India’s west coast. So there is still is time India to get Iran oil delivered in Nov. It was also interesting to see Reuters Wed story [LINK] “India’s government has not told refiners to halt Iranian oil imports: source”, which only really says the refiners may be cutting but it wasn’t because the govt told them.
China may now be giving in and cutting Iran oil imports. The big oil story this morning was Reuters “China’s Sinopec halves Iran oil loadings under U.S. pressure: sources” [LINK]. Reuters is reporting that Sinopec has cut its Nov loadings down to 130,000 b/d and that this was a cut of approx. half. The China position has been that they wouldn’t cut nor would they increase Iran oil imports ie. stay the same. Our Aug 5, 2018 Energy Tidbits memo [LINK] noted Bloomberg’s story that week [LINK] “China Rejects U.S. Request to Cut Iran Oil Imports” that reported “The U.S. has been unable to persuade China to cut Iranian oil imports, according to two officials familiar with the negotiations, dealing a blow to President Donald Trump’s efforts to isolate the Islamic Republic after his withdrawal from the 2015 nuclear accord. Beijing has, however, agreed not to ramp up purchases of Iranian crude, according to the officials, who asked not to be identified because discussions with China and other countries continue. That would ease concerns that China would work to undermine U.S. efforts to isolate the Islamic Republic by purchasing excess oil.” In theory, China still has time for China to put orders in and get Iran oil delivered to China, but its only at most a couple weeks for oil to get to China by mid Nov. An oil tanker time would be approx. 25 days to a port like Shanghai.
If BOTH China and India are giving in, it points to Iran cut barrels being way more than expected. This morning’s report is significant as it is pointing to China giving into the US sanctions. If we assume China and India changes means that they cut in half, this would put the cut in Iran oil exports at 1.7 mmb/d and above the range we have been assuming 1 to 1.5 mmb/d. And we expect a cut like this would be well above market expectations. And why we expect oil prices will continue to strengthen unless we see reports in the next week or so that Saudi Arabia has increased tanker loadings and we have not seen any such reports as of today,
We do see this impact of Iran cut barrels easing around year end. In our Sept 18, 2018 SAF 2019 Energy Market Outlook webcast [The webcast is found at:[LINK]], we reminded of the key reason why the impact of Iran cut barrels would ease modestly around year-end – oil demand is seasonally lower in the winter than the fall and summer and this is true every year. And why the Iran cut barrels will easier to accommodate in Q1/19. In our outlook webcast, we said “When I was speaking on Saudi Arabia maybe only have limited spare capacity I said “And If Saudi Arabia only has another 300,000 to 400,000 b/d of real short term surplus capacity, it may be okay for this winter when oil demand is always seasonally lower, but this will clearly be factor next summer.” And then on the next slide speaking on Iran and Venezuela, I said “The combination of Iran and Venezuela should take another 800,000 to 900,000 b/d out of the global oil supply chain in the next few months. And we don’t see how it can be replaced in this short time period. Fortunately, we are moving into winter, when global oil demand is always seasonally lower. And this lower demand will help mask the shortfall. “ Our slide for this text showed the IEA”s estimate for Q1/19 oil demand being 1 mmb/d lower than Q4/18.
But we also see the potential for oil price spikes in Q2/19 and Q3/19. This lower Q1/19 oil demand should help mask or ease the impact of the Iran cuts, but we also warned that there is the setup for oil price spikes in Q2/19 and Q3/19. Here is what we said on this potential. ““We should get a good test of this lower level of surplus capacity next summer as we see the potential for oil price spikes. Global oil demand is always lower seasonally every winter, it is expected to be down 1.0 mmb/d in Q1/19 vs Q4/18. This is a cushion against the near term big declines expected at Venezuela and Iran. But the challenge is that, after the winter, global oil demand always seasonally increases. Q2/19 oil demand is expected up 1.2 mmb/d in Q2 vs Q1, and then up another 0.9 mmb/d in Q3 vs Q2. This means that Q3 oil demand should be up 2.1 mmb/d vs Q1/19. US oil supply growth can help cover a portion of the increased demand assuming Permian oil takeaway is completed. The EIA forecasts US oil supply in Q3/19 to be up 400,000 b/d vs Q4/18. Maybe Saudi Arabia adds another 400,000 b/d to get to ~10.8 mmb/d. But Russia’s surplus 0.3 mmb/d and Saudi Arabia’s surplus capacity (beyond the next 0.4 mmb/d or so) could both require months and not weeks and more capital to bring on stream, and they would have to get going right now to impact Q2/19. And this is the math problem, where does an additional 2.1 mmb/d come from to cover the normal increasing seasonal oil demand? Hence, our concern for the potential for price spikes up in Q3/19 and even Q2/19 looks to be high”