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Iranian crude blends seen getting lighter to meet Chinese tastes

Highlights

Iran Light’s API creeping above 35, traders say

Chinese refiners asking for lighter oil blends

Some West Karun oil fields producing less heavy oil

Iran's flagship crude grades could start to get marginally lighter in quality due to the fluctuating appetite of its Chinese customers, which are starting to favor lighter and more medium oil blends, according to market sources.

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The slight change in some of its crude export blends is also occurring as production from the country's West Karun oil fields ramps up in preparation for the removal of US sanctions.

These quality shifts may put Iran in increasing competition with West African producers, in addition to its traditional Middle East rivals.

Iran's crudes are mostly sour in quality due to their high sulfur content. They normally also have a higher specific gravity and are classified as heavy or medium, with gravities ranging from 27 to 34 API.

The country's main export grade Iran Light, which is a medium sour grade with 33.6 API gravity and 1.46% sulfur content, according to the crude assay published by the state-owned National Iranian Oil Company (NIOC). Meanwhile, Iran Heavy export grade is a heavy sour crude with an API gravity of 29.5 and sulfur content of 1.77%.

Chinese trading sources, however, say the Iran Light barrels they are receiving have APIs exceeding 35. Crudes that have an API over 34 are considered light crudes.

Chinese refiners, which have been gradually lightening their crude slate in recent months, have requested lighter grades from Iran, which NIOC is trying to accommodate, sources told S&P Global Platts.

Despite US sanctions that are intended to heavily penalize buyers of Iranian oil, China's independent refineries have maintained some level of Iranian crude imports, mainly Iran Light and some Iran Heavy, in the past few years, according to market sources.

These refiners crack Iranian Light directly into their crude distillation units, while Iranian Heavy needs to be mixed with light grades to feed into the CDUs, sources added.

Chart: Quality footprint of Iran's key crude grades

New blends

NIOC is "increasing the share of Iran Light in the export basket and will stop the export of Pars crude which is ultra-heavy," said Sara Vakhshouri, president of energy consultancy SVB Energy International, who closely follows Iran's oil industry.

"During the sanctions period, they have been exporting different grades and cocktails [blends] of oil, based on their customer's needs [that was requested by Chinese refineries]. Iran also consumed lighter crude domestically during the sanctions," she added.

Iman Nasseri, who runs consultancy FGE's Iran service and previously worked in the country's oil industry, said the lighter crude slate may be due to Iran drawing from its substantial stocks of lighter grades and condensates that had built up while sanctions have been imposed.

He said the change in quality could be more of a "temporary issue" to meet the interests of its current narrow customer base rather than "a structural shift."

Other sources said Iranian crude grades are getting slightly lighter and, in some cases, even sweeter, due to increased production from the newer West Karun oil fields, which are located on Iran's western border with Iraq

The West Karun oil fields include five major fields: North Azadegan, South Azadegan, North Yaran, South Yaran and Yadavaran.

Iranian oil in floating storage has more than doubled since mid-January when Joe Biden became US president, as it prepares for a full return to the global oil market after years of US sanctions.

Iran's oil tankers were holding around 32 million barrels of crude and condensate at sea for the week beginning May 24, according to estimates from data intelligence firm Kpler.

Representatives at NIOC were unavailable for comment.

Market share

Iran's crudes compete directly with grades such as Saudi Arabia's Arab Heavy, Arab Light and Arab Medium; Iraq's Basrah Light, Basrah Medium and Basrah Heavy; Russia's Urals; the UAE's Upper Zakum; Oman Crude Blend; Kuwait Export Crude; Venezuela's Mesa 30 and Merey 16; and Mexico's Mata, among others.

The changing quality of Iran's oil means it also increasingly competitive with some crudes from Gabon, Angola and the Republic of Congo, sources said.

Iran is now preparing for a quick ramp-up of its production and oil exports.

Iran pumped 2.43 million b/d of crude oil in April, according to the monthly S&P Global Platts survey of OPEC output, a rise from about 2.0 million b/d at the end of 2020. Immediately prior to the US reimposing sanctions in 2018, Iran pumped at a peak of 3.8 million to 3.9 million b/d.

Iranian crude and condensate exports will rise from 600,000 b/d in May to 1.5 million b/d by December if a deal can be reached in the coming weeks that allows for full sanctions relief by September, according to S&P Global Analytics.

"Interim oil sanctions waivers are also possible, as Iran progresses toward full nuclear compliance," it said in a recent note.

Iranian crude and condensate exports were averaging as high as 2.90 million b/d in early May 2018, when US under the Trump administration withdrew from the Iran nuclear deal.