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Analysis: Asian crude buyers fear tighter supplies as Iran waivers vanish

Highlights

China says it opposes unilateral sanctions on Iran

India has alternative crude buying plan in place

South Korea still aims to persuade the US to extend waivers

Singapore — China's refiners on Tuesday said they were awaiting government orders on Iran crude oil imports, with some pushback against sanctions likely, while India said it had an alternative buying plan in place to make up for supply losses following Washington's decision to not extend waivers on Iranian crude.

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While Japan said it does not see any immediate need for it to release its strategic petroleum reserves to alleviate supply concerns, South Korea plans to find ways to convince the US to consider extending the waivers.

"China opposes the unilateral sanctions and so-called 'long-arm jurisdictions' imposed by the US. Our cooperation with Iran is open, transparent, lawful and legitimate, and thus should be respected," Geng Shuang, a spokesman for China's Ministry of Foreign Affairs said.

The White House announced Monday that the US would end all waivers from Iran oil sanctions when they expire May 2, a decision that drew an immediate threat from Iran to close the Strait of Hormuz. Crude futures settled at fresh six-month highs Monday as the market stared at a tighter global supply outlook.

The decision will not only have an impact on the crude market, but it will also have implications on the condensate market by tightening the supply pool. This paints a bullish outlook for the global ultra-light crude complex over the longer term, although weak naphtha cracks may cap any upside in Asian condensate price differentials in the near term.

The end of the waivers could mean that exotic European and African condensate grades like Norway's Snohvit and Ormen Lange, Nigeria's Escravos, as well as Russia's arctic Sabetta condensate could feed condensate splitters across Northeast and Southeast Asia on a more regular basis, sources said.

Iranian crude oil official selling prices to Asian customers

PUSHBACK FROM CHINA

Chinese refinery executives and officials indicated a likelihood of pushback from the central government on compliance with US sanctions.

China is the single largest importer of Iranian crude, and along with India accounted for nearly 70% of the combined share of Iran's exports in the fourth quarter of 2018, before easing to around 65% in the first quarter of 2019, according to Barclays data.

Chinese state-owned refiners said they were still waiting for government orders on how to manage Iranian crude imports. That could get tricky as Iran mainly supplies medium and heavy grades, which are currently in tight supply and often available at discounted rates.

"It is possible to make up for the volume cut from Iran with grades from other countries, but the quality and economics cannot be substituted, as refineries prefer grades with high yields of naphtha, and most importantly at cheap prices," an executive at a major Chinese state-run refiner said.

INDIA'S ALTERNATIVE PLAN

Indian state-run refiners will be aiming to step up crude imports from countries such as Mexico and Iraq, to make up for any supply losses.

"We have so many sources for our crude. With all those countries with whom we have term contracts, there is scope to raise the volumes from them," a senior official at state-run Indian Oil Corp. said.

Indian petroleum minister Dharmendra Pradhan said India had a robust plan to adequately supply crude to domestic refineries.

"There will be additional supplies from other major oil producing countries," Pradhan said in a tweet.

IOC has a plan to source crude from Mexico, apart from the United States. Other state-run refiners are likely to step up purchases from Iraq, refinery sources said.

Iranian oil exports averaged more than 1.7 million b/d in March, with more than 357,000 b/d sent to India, according to Platts trade flow software cFlow and shipping sources.

"A key question at this point is enforcement by China and India, who have been importing 400,000-600,000 b/d and 200,000-300,000 b/d in recent months, respectively. And it was left unclear whether enforcement begins at transaction or delivery date," S&P Global Platts Analytics said.

JAPAN AND SOUTH KOREA'S RESPONSE

Japan's Minister of Economy, Trade and Industry Hiroshige Seko said the country does not see any immediate need for it to release its strategic petroleum reserves to alleviate supply concerns following the US announcement on Iran.

While acknowledging the volume impact Japan will face, given that replacing Iranian oil imports is limited, Seko said the country would take necessary action by holding close discussions with local companies.

Japan imported 135,013 b/d of Iranian oil in February, marking the first import in four months, according to METI data. Iran was the fifth-largest crude supplier to Japan in February, accounting for 4.4% of Japan's total imports of 3.09 million b/d.

Japanese refiners Idemitsu Kosan, Showa Shell and Fuji Oil said they will consider their options, including alternative crude procurements to ensure stable supply.

A spokesman for Fuji Oil said the refiner will consider alternative crude procurements, including supplies from the Middle East as well as from North and South America, and Russia. JXTG Nippon Oil & Energy said it was confident of securing alternative crude supplies from the Middle East and other regions, including West Africa.

On the other hand, Seoul remains hopeful that Washington could reconsider and possibly extend the waiver for South Korea to allow importing Iranian crude and condensate beyond May 2, a senior official at the Ministry of Foreign Affairs told S&P Global Platts.

South Korea had only resumed crude imports from Iran in January, after a four-month hiatus.

-- Sambit Mohanty, sambit.mohanty@spglobal.com

-- Eric Yep, eric.yep@spglobal.com

-- Takeo Kumagai, takeo.kumagai@spglobal.com

-- Gawoon Philip Vahn, philip.vahn@spglobal.com

-- Analysis by Daisy Xu, newsdesk@spglobal.com

-- Edited by Geetha Narayanasamy, newsdesk@spglobal.com