Saudi Arabia and allies can replace lost Iranian oil

The US government has said it won’t extend the sanctions waivers for eight countries importing crude oil from Iran, in a move that could remove around 1.1mn b/d from the market.

Commenting on the news, consultancy Rystad Energy says that while it had anticipated a further tightening of sanctions, the details in the announcement have led it ‘to revise our forecast downward for Iranian crude production’.

The analyst forecasts that production will drop to 2.27mn b/d for 2H2019, reaching this level by July 2019, which equates to a drop of 0.43mn b/d from current March 2019 levels.

The net effect for the oil market is bullish, as the market will lose more supply from Iran, mostly of medium-sour and heavy-sour quality.

‘However, Saudi Arabia and several of its allies have more replacement barrels than what would be lost from Iranian exports in a worst case scenario. This should limit the positive impact on crude prices,’ says Rystad Energy Head of Oil Market Research, Bjørnar Tonhaugen. ‘Since October 2018, Saudi Arabia, Russia, the UAE and Iraq have cut 1.3mn b/d, which is more than enough to compensate for the additional loss. However, realistic spare capacity will be cut significantly, reducing room for error in Libya, Nigeria, and Venezuela.’

Rystad Energy reports that Iranian crude exports have dropped from around 2.5mn b/d in April 2018 to around 1.1mn b/d currently (April).

‘In our new base case, we no longer expect India to buy Iranian oil after May 2019, and now only expect China and Turkey to continue purchasing Iranian cargoes. We lower our Iranian crude exports estimate from 900,000 b/d to 600,000 b/d from May 2019 onwards, allocating around 500,000 b/d of exports to China and the remainder to Turkey,’ Tonhaugen remarks.

The density and suphur content of the main crude grades exported by the ‘four cutters’ –  Saudi Arabia, UAE, Iraq and Russia – are of similar quality to Iran’s main export grades, Iranian Heavy and Iranian Light.

‘Saudi Arabia, Russia, the UAE, and Iraq will have no problem replacing Iran’s crude grades, such as Iranian Heavy, Iranian Light, and West Kharoon,’ Tonhaugen says. ‘We believe that Saudi Arabia has ample capacity of Arab Light especially, which is a grade of similar quality to Iranian crudes, due to the current production cuts. Russian Urals and Iraq’s Basra Light is also comparable to Iranian crude quality, while UAE’s main export grades are somewhat lighter and sweeter than Iran’s.’

However, according to The Times, Saudi Arabia has said it will not immediately increase oil production, despite the tightening of US sanctions on Iran. The Saudi Energy Minister Khalid al-Falih is reported to have stated that the country would respond to customers’ needs if requests for more oil were received, but he did not see ‘the need to do anything immediately’. The comments helped to keep Brent crude above $74/b on 24 April.

Figure 1: Iran oil quality versus key Saudi Arabia, UAE, Iraqi and Russian grades – size of bubble indicates 2019 crude oil production in mn b/d
Source: Rystad Energy