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Analysis: Iran sanctions impact drives up Middle East crude oil complex

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Analysis: Iran sanctions impact drives up Middle East crude oil complex

Singapore — The Middle East crude complex saw a sharp uptick when the October trading cycle rolled to November this week, as market participants braced themselves for the impact of Iranian sanctions.

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"Structure [is] very strong," a Singapore-based crude trader said.

The spread between November Dubai cash and swap widened from 88 cents/b at the end of August, to $1.42/b on September 3, the first trading day of the November cycle.

The spread -- a barometer for the health of the Middle East sour crude market -- has since remained firmly above the $1/b, a level it breached for the first time since June this year.

Sour crudes saw a challenging October cycle last month as market dynamics allowed for millions of barrels of lighter, sweeter crude grades to flow into Asia from the US, North Sea, West Africa as well as the Mediterranean.

September could play out very differently as crude oil traders start lining up their allocations for November-loading barrels, market sources said on Wednesday.

Iranian sanctions and the resulting shortage of medium to heavy sour crude barrels remain the foremost consideration around which traders are placing their bets on the physical and paper crude markets, market sources said.

The extent to which traders view the risk of Iranian barrels being completely shunned from the market will in turn, to a large extent, drive the Middle East crude complex this month, the sources added.

"The market is anticipating the impact of Iran sanctions more than necessary," one source based in China said.

"[Some of] them are assuming China and India will completely stop buying Iran crude and so they are putting in the positions for that," the source said.

"Fundamentally, I don't see it happening quite like that," he added.

China and India will likely demonstrate partial compliance, given various strategic interests including the ongoing US-China trade war and India's recent move to lock in term contracts for US crude exports. China may cut less than 20% of its Iran imports from April levels, according to S&P Global Platts Analytics, while India may cut closer to one-third.

Nevertheless, as the November 5 implementation date set by US President Donald Trump nears, Asian refiners are negotiating for waivers on existing long term crude oil contracts, while at the same time sourcing for replacement crudes in the spot market.

This has driven demand for medium to heavy sour crudes substantially higher in recent weeks, while their discount to typically more premium lighter crudes has narrowed.

Oil exports from Iran have fallen steeply in the first half of August, according to S&P Global Platts trade flow software, cFlow. Initial estimates suggest that Iranian crude oil and condensate exports have plummeted to 1.68 million b/d in the first 16 days of August, down from over 600,000 b/d of loadings in July.

Various sources estimate that anywhere between 600,000 b/d to 1.2 million b/d of Iranian oil could come off the market come November 5.

The Dubai cash-swap spread was assessed at $1.20/b as of September 4, Platts data showed. As of 0700 GMT Wednesday, it was pegged at $1.23/b.

--Eesha Muneeb, eesha.muneeb@spglobal.com

--Edited by Norazlina Juma'at, norazlina.jumaat@spglobal.com