SINGAPORE (Reuters) – If there was any hope of an early resolution to the reanimated dispute between the United States and Iran, it was extinguished by the testy exchanges between the countries’ leaders at the United Nations.
U.S. President Donald Trump promised more sanctions against what he called the “corrupt dictatorship” in Tehran, while his Iranian counterpart Hassan Rouhani responded by saying his rival suffers from a “weakness of intellect.”
For oil markets, this seems to lock in the loss of Iranian crude supplies when the U.S. sanctions ramp up in November, although there is still some doubt as to exactly how much the Islamic Republic’s usual exports of some 2.1 million barrels per day (bpd) will be sidelined.
Several traders and analysts attending the Asia Pacific Petroleum Conference, hosted this week in Singapore by S&P Global Platts, expressed the view that as much as 1.5 million bpd may be lost to global markets.
This is a figure well above initial estimates of around 500,000 bpd when Trump’s administration withdrew from the multilateral agreement aimed at limiting Iran’s nuclear program and re-imposed sanctions.
The imminent loss of Iranian crude, even at the lower end of estimates, has helped drive prices to a four-year high, with Brent futures touching $82.55 on Tuesday, the most since November 2014.
But it’s also worth noting that the Iranian situation is the latest in a series of disruptions to oil markets, which have largely re-shaped how they operate, especially in Asia, the fast-growing region that buys about two-thirds of Middle East exports and is home to three of the world’s top four importers.
The first major disruptor was the November 2016 agreement between the Organization of the Petroleum Exporting Countries (OPEC) and allied producers, including Russia, which is largely credited for reversing the slide in prices.
But the deal also affected trade flows in Asia as the bulk of the barrels that OPEC and Russia removed were medium to heavy crudes, largely favored by Asia’s complex refineries.
Initially this led to the price of heavier crudes rising relative to the global benchmark Brent light crude, but this trend actually reversed as Asia’s refiners adapted.
Chinese refiners, particularly the smaller independent operators, switched to lighter grades from Russia, Brazil, West Africa and the United States, and optimized their plants to run on these grades.
The loss of Venezuelan heavy crudes because of the mounting political and economic crisis in the Latin American country further encouraged Asian refiners to seek alternative supplies.
The second disruptor of significance was the rise of the United States as a major supplier to Asia, with Chinese refiners especially keen on the light, sweet oil that made up most of the exports, although it’s worth noting that some heavier crude from offshore Gulf of Mexico fields also made its way east.
But just as this flow was getting established, it was thrown a curve ball in the form of the escalating trade dispute between the Trump administration and China, which led Beijing to threaten to impose tariffs on U.S. crude, although this hasn’t yet happened.
But even the threat was enough to prompt Chinese refiners to pull back from buying cargoes from the United States, with vessel-tracking data showing no tankers are expected in October, a dramatic fall from the record 466,000 bpd imported in June.
In some ways the major surprise of the past two years is that oil markets have been able to adjust fairly quickly and successfully to disruptions that are largely the result of political decisions.
The concern in the oil market in Asia is that the loss of Iranian oil may prove to be the straw that breaks the camel’s back in terms of its ability to adjust, but it’s also hard to rule out some new twists and turns in the story.
How effectively will Iran be able to circumvent sanctions, will Iranian exports increasingly become “ghost” vessels with their tracking systems disabled?
Will Trump realize that he’s pursuing contradictory goals in trying to choke Iran’s exports and keep oil prices below $80 a barrel, and if he does, what will he do?
If oil does rise to around $100 a barrel, as some trading houses suggest is possible within months, will it result in faster demand destruction and increase the risk of a global slowdown and an emerging markets crisis?
All of these factors remain in the realm of possibility, but there are some clear trends that have emerged from the recent disruption to Asian crude oil markets.
The first is that Asia’s refiners have diversified their crude suppliers, and are likely to continue to take more light grades, even if heavier grades become more freely available.
The second is that the consequence of these upheavals is being felt in product markets, with lighter crudes producing more gasoline relative to middle distillates, such as gasoil and diesel.
The profit from making gasoil in Singapore reached a peak of $16.66 a barrel on Sept. 4, the highest since November 2015, while the margin on a barrel of gasoline dropped to $3.38 on July 4, the lowest in two years.
Editing by Richard Pullin