Asian refiners cheer rising Iranian crude output, assess chances of sanctions removal

Asian refiners are expecting Iran's growing crude oil production and exports to partly offset the impact of OPEC+ supply cuts even as regional condensate trade flows could shift if the US decides to lift sanctions against Tehran, though outright oil prices are not likely to face much pressure.

Refiners and petrochemicals makers across Northeast Asia said they are keeping a close eye on Iranian crude supply and assessing the possibility of sanctions being removed in the near to medium term, after industry executives discussed the Persian Gulf producer's role in the global market during the Asia Pacific Petroleum Conference 2023 organized by S&P Global Commodity Insights Sept. 4-6

Although OPEC and its allies are maintaining the firm stance of limiting the group's production levels, Iran's ambitious output targets and ample exports to China are playing a crucial role in alleviating Asian refiners' concerns about the tight global supply condition, traders, analysts and refinery feedstock management sources based in Singapore, South Korea, Japan and Hong Kong told S&P Global Sept. 11-14.

India's active Russian crude purchases and China's ample Iranian crude imports are helping the entire Asian refining industry in Taiwan, Japan, Thailand and South Korea to not face any serious issues securing their full monthly term contractual volumes from Middle Eastern suppliers despite major OPEC+ members' firm production cut commitments, traders and refinery feedstock managers said.

"I understand there were discussions during the APPEC last week that large volumes of Russian and Iranian crude feeding Indian and Chinese refiners are creating the space for other key Asian crude importers to take staple sour crude supplies from top Middle Eastern producers and this is very true," said a feedstock trading and logistics manager at a major Japanese refiner.

The Asian refining community is seemingly working together in a prudent way to react, respond and adapt to the OPEC+ cuts, according to feedstock managers and refining margin analysts at a Thai refiner and at two South Korean refiners, including S-Oil.

Iran sanctions outlook

The market has witnessed some signs in recent months that could potentially lead to easing of economic sanctions on Iran, raising hopes across the Asian refining industry and trading community that they could be allowed to freely buy and trade Iranian sour crude and condensate, traders and refinery sources said.

Iran has been taking a more relaxed approach in its recent interactions with Washington. The dialogues between the two sides have improved significantly and South Korea's release of frozen Iranian assets in August all point to higher Iranian crude exports and trades to unfold, Frederic Lasserre, global head of Research & Analysis at Gunvor Group, said during the APPEC.

"It's too early to get too optimistic but I can at least sense that the chances [of potential lifting of the sanctions] have increased lately and who knows how soon the [Asian] market would be able to buy Iranian crude without any restrictions once again," said a feedstock manager at a major South Korean petrochemicals maker.

Ben Luckock, cohead of oil trading at commodities trading house Trafigura, had indicated during a panel discussion at the APPEC that the next US presidential election is approaching and the market would be watching how the new administration would shape Iran's role in global diplomacy and the energy markets.

"It [Washington's diplomatic stance with Iran] could be an entirely different path, depending on who wins [the next US presidential election]," Luckock said in the week ended Sept. 9.

Price, trade flow impact

The fact that large volumes of Iranian oil are currently flowing in the market could mean that oil prices would not fall as much even if the US lifts sanctions, market participants said.

Inflation remains a worry across key Asian economies and Iranian supply could help slow the recent uptrend in oil prices. However, the potential lifting of sanctions would not put much pressure on benchmark prices since Iranian oil is regularly flowing in the Asian market, according to traders and refinery sources based in Singapore and Japan, as well as a senior market research analyst at Korea Petroleum Association based in Seoul.

In July, around 46 million barrels of Iranian crudes have been imported by China's independent refineries, marking the highest monthly shipment so far this year, S&P Global reported previously.

Still, spot market price differentials and trade flows for ultra-light crude, or condensate, could shift drastically in the event of the US deciding to allow free trade of Iranian oil, market sources and analysts said.

"China will likely remain the dominant buyer of Iranian medium and heavy sour grades but many Asian refiners and petrochemical makers would chase after highly economical Iranian South Pars condensate [if sanctions get lifted]," the feedstock manager at a Japanese refiner said.

Asia has been relying heavily on Qatar and Australia for condensate supplies in the past several years but access to cheaper South Pars condensate would completely change the market dynamics as buyers would take the upper hand, while lower feedstock costs could help lift downstream margins, the feedstock manager at a major South Korean petrochemical maker said.

Platts assessed Iran's South Pars condensate at an average discount of $4.86/b to Qatar's Deodorized Field Condensate to date this year, S&P Global data showed.