Asian refiners equipped with condensate splitters will likely favor Iranian ultra-light crude heavily over other similar grades offered in the market when US sanctions against Tehran are lifted, as the companies expect Iranian South Pars condensate's steep price discount to boost their product margins.
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More and more Asian refiners and petrochemical makers are preparing for a possible resumption in Iranian crude and condensate trades amid growing optimism that severe restrictions on Iran's oil sales could be lifted before the end of the third quarter.
Iran's President Hassan Rouhani said on May 20 that a "main agreement" has been reached, with the US broadly committing to lifting its sanctions targeting Iran's oil, petrochemical, shipping, insurance and banking sectors.
Although final details have yet to be settled, US, Iranian and European negotiators will convene this week for a fifth -- and what they hope will be the final -- round of talks over reinstating the nuclear deal, known as the Joint Comprehensive Plan of Action.
South Korean, Chinese and Japanese petrochemical makers and refiners told S&P Global Platts that the companies are especially excited about the potential resumption in Iranian oil trades as the Persian Gulf producer could provide an abundance of highly economical crude and condensate to Asia.
The Northeast Asian end-users, including South Korea's Hanwha Total and SK Innovation, China's Sinopec and Fuhaichuang, or formerly known as Dragon Aromatics, as well as Japan's ENEOS were some of the biggest customers of Iranian oil prior to the sanctions.
Iran's flagship ultra-light crude, the South Pars condensate, is a feedstock grade especially on many Northeast Asian refiners' radar at the moment, as Asia's main condensate supply sources have been limited to just Qatar and Australia.
"Asian refiners have been actively procuring ultra-light crude oil from Norway, Nigeria and Equatorial Guinea as well, but these producers only hold small volumes to offer every month ... that's why we need a major producer like Iran to return to the market," a feedstock manager at Hanwha Total said.
During the absence of Iranian offers over the past two years, Asian condensate importers have been paying at least 50 cents/b, or more, than the market value for ultra-light crude cargoes from Qatar and Australia, according to refinery feedstock purchasing managers and condensate traders in China, South Korea and Singapore.
South Pars discount
South Pars condensate's competitive price tag could mean that petrochemical makers could obtain cheaper feedstock naphtha by cracking the condensate, while refiners could sharply improve their profit margins for producing and blending gasoline, industry sources, market analysts and traders said.
Multiple refiners and trading firms across Northeast, Southeast and South Asia are actively reviewing recent months' Iranian crude official selling price differentials, as well as Platts South Pars condensate assessments to analyze the adequate market value of Iranian grades, various refinery and trading sources told Platts.
Before the sanctions, South Pars condensate had typically traded at a discount of at least $2/b to Qatar's Deodorized Field Condensate, or DFC, in the market, according to the trading sources surveyed by Platts.
The Iranian ultra-light crude was assessed at a discount of $3.90/b to Platts front month Dubai on May 24, while DFC was assessed at a premium of 60 cents/b to Dubai, Platts data showed.
The outright price spread between South Pars and Australia's North West Shelf condensate averaged minus $5.83/b to-date in 2021, compared with the average spread of minus $3.04/b in 2020, minus $1.42/b in 2019 and minus 12 cents/b in 2018, Platts data showed.
The return of Iranian condensate, as well as many other crude grades, will likely set the stage for a new competition for the Asian demand pie, prompting major producers to make competitive offers in the market, which would significantly enhance Asian refiners' feedstock economics and the overall product margins, according to refinery officials and trading sources in China, South Korea, Japan, Hong Kong and India.
"It would be especially interesting to see how Saudi Aramco would react and set the Saudi monthly crude OSPs [in the event that Iranian oil returns to the market]," a Middle Eastern sour crude trader based in Hong Kong said.
The OSP spread for Iranian Light and Arab Light crude for loading in June stands at minus 20 cents/b, marking the biggest discount for the Iranian grade against the Saudi oil since minus 35 cents/b for the cargoes loaded in March 2020, Platts data showed.