U.S. Pays as Sanctions Lift Iran Profit: Energy Market

Feb. 29 (Bloomberg) -- U.S. drivers are suffering from surging prices for gasoline as Iran benefits from sanctions that sent crude oil to the highest levels in nine months.

Prices at the pump this week were an average 10 percent above the levels of a year ago and the highest for this time of year in Energy Department records starting in 1973, after Brent, the benchmark grade for U.S. imports from Europe and Africa, climbed 13 percent this year. Rising oil prices are allowing Iran to reap 20 percent more from its crude exports, according to Mirae Asset Securities Ltd., the most accurate forecaster for New York futures among 26 analysts ranked by Bloomberg in the two years ended June 2011.

Gains that have made gasoline the second best-performing energy commodity this year underscore the challenge President Barack Obama faces of curbing Iran's nuclear program while minimizing the costs to motorists in an election year. Investors are more bullish on the fuel than at any time since at least 2006 on speculation a wave of refinery closures will keep supplies limited during the summer driving season, data from the Washington-based Commodity Futures Trading Commission show.

"Iran is smartly exploiting the high winter seasonal demand for crude and the geopolitical rhetoric scare to drive up its oil revenues," Gordon Kwan, head of regional energy research at Mirae in Hong Kong, said in an e-mail. "There is no way other oil-producing countries can increase their output to offset the lost Iranian crude."

Iranian Crude

The average price of Iran's Heavy, Light and Forozan crude rose as much as 15 percent from Dec. 30, according to crude prices compiled by Bloomberg News as of Feb. 27. Based on last year's export level, that translates to additional revenue of about $36 million a day. The Persian Gulf country, OPEC's second-biggest producer, shipped about 2.26 million barrels a day in the first half of 2011, data from the Energy Information Administration showed on Feb. 17.

The gains in oil have helped push gasoline 14 percent higher this year on the New York Mercantile Exchange. Pump prices in the U.S. averaged $3.721 a gallon, a record for the month, Energy Department data showed Feb. 27, compared with $3.383 a year earlier, even as demand dropped 6.1 percent. The most-expensive city was Los Angeles at $4.352.

Brent exceeded $125 last week for the first time in nine months after the International Atomic Energy Agency said Iran dismissed its inspectors' concerns over possible nuclear-weapon work and tripled its quarterly rate of producing 20 percent- enriched uranium. Weapons-grade uranium can be processed from a larger proportion of the lower-enriched fuel, according to the London-based Verification Research, Training and Information Center, a non-governmental observer to the IAEA funded by European governments. Brent traded as high as $123.20 today in London.

'Unfounded Allegations'

The Islamic republic said the concerns were based on "unfounded allegations," the IAEA said Feb. 24 in an 11-page restricted document distributed to member states and obtained by Bloomberg News. The U.S. and European Union say the nuclear program is a front for work on a weapon, a charge President Mahmoud Ahmadinejad's government denies.

The rise in gasoline is driven by the crude market, said Mark Routt, a senior consultant at KBC Energy in Houston. Brent has risen more than any other energy commodity in the Standard & Poor's GSCI index of 24 raw materials.

"Refiners weren't making money on gasoline, then in February margins were relatively decent after a terrible fourth quarter and then we had this crude spike," he said.

About 700,000 barrels a day of U.S. fuel-processing capacity has been removed from domestic markets in the past five months following refinery closures. Hovensa LLC, a partnership of Hess Corp. and Petroleos de Venezuela SA, shut its 350,000 barrel-a-day St. Croix refinery in the Virgin Islands Feb. 21, the eighth largest U.S. refinery and the biggest to close in more than two decades, according to Energy Department records.

Hedge funds and other large speculators boosted bullish gasoline bets to a record in the week ended Feb. 21, the CFTC's weekly Commitments of Traders report showed Feb. 24. Net-long positions increased 2.8 percent to 90,390 contracts of futures and options, the highest level in data going back to June 2006.

"What's really apparent is that traders are taking a long view on gasoline," Sander Cohan, an analyst at Energy Security Analysis Inc. in Wakefield, Massachusetts, said Feb. 22. The closures of East Coast plants and the Hovensa refinery, which exported almost exclusively to the U.S., have contributed to the increase in gasoline prices, he said.

Sunoco Inc. and ConocoPhillips idled the 178,000 barrel-a- day Marcus Hook and 190,000 barrel-a-day Trainer, Pennsylvania, plants. Sunoco also plans to shut the Philadelphia refinery, the East Coast's largest, by July if it's not sold. Together, the plants account for almost half of the region's refining capacity.

'Game the System'

Traders are anticipating the chance for a supply shortage with the approach of the peak driving season that traditionally starts during the U.S. Memorial Day holiday, according to Stephen Schork, president of the Schork Group in Villanova, Pennsylvania.

"You have Wall Street that knows what's going on and they've been buying the heck out of gasoline futures," he said in a Feb. 22 phone interview. "Wall Street is trying to game the system."

Suppliers will need to replace as much as 240,000 barrels of gasoline a day by next year if Sunoco's Philadelphia plant shuts, the Energy Department said Feb. 27 in a report.

The closing of East Coast refineries will make the region, where Nymex gasoline contracts are delivered, more dependent on imports, Routt said.

"When our supply lines are much longer, inevitable disruptions are going to take longer to resupply and the odds that we're going to have the disruptions have increased," he said in a Feb. 22 telephone interview.

Midwest Cheaper

The increases in pump prices aren't distributed evenly around the U.S. Prices have risen faster along the coasts of the U.S. than in the Midwest, where refiners have access to ample supplies of less costly crude from North Dakota and Canada.

Refiners in the Midwest increased the amount of oil they use to the highest level for this time of year in two decades, boosting gasoline inventories to a two-year high Feb. 10, Energy Department data show.

"Midwest margins are still remarkable," said Bill O'Grady, chief market strategist at Confluence Investment Management in St. Louis, Missouri. "Oil is inadvertently being bottled up" in the region because of expansion in the Bakken shale and production gains in Canadian tar sands, he said.

Gasoline in Chicago cost 4.3 cents more than in Houston Feb. 20, the smallest premium since October 2005, after Hurricanes Katrina and Rita reduced oil processed at Gulf Coast plants by as much as 56 percent, Energy Department data show. Chicago is the cheapest relative to New York since December 2008.

Election Issue

The Bakken formation in North Dakota, the largest U.S. deposit of unconventional crude oil, averaging 535,000 barrels a day of production in December, may hold the key to cutting gasoline prices, former house speaker and presidential hopeful Newt Gingrich said in an address on a campaign website.

"You know there are no quick fixes to this problem, and you know we can't just drill our way to lower gas prices," Obama told an audience Feb. 23 in Miami.

Prices are also getting a boost from an increase in exports of gasoline to record highs, as fuel consumption increases in Latin America.

Cargoes of the fuel leaving the U.S. have almost tripled in the past year. Exports averaged 616,000 barrels a day in the week ended Feb. 17, up from 223,000 barrels a year ago, Energy Department data show. Net imports of finished gasoline and blending components fell to 34,000 barrels a day in October.

Export demand for gasoline is a "mild support in the grand scheme of things" for refiners, Cohan said.

Strategic Reserve

Representatives Ed Markey of Massachusetts, Peter Welch of Vermont and Rosa DeLauro of Connecticut, asked Obama Feb. 22 to release oil from Strategic Petroleum Reserve stockpiles. Republicans opposed the request.

The U.S. sold 30 million barrels of oil from the reserve in July and August last year under an International Energy Agency effort to ease shortages exacerbated by the conflict in Libya. The U.S. has withdrawn oil 18 times since 1985, including in 2008 after hurricanes Gustav and Ike struck the Gulf Coast.

"If we do get a break it won't be until demand falls off or the administration releases some strategic crude," Schork said.

The risk to oil prices is "becoming increasingly skewed to the upside," as tension between Iran and the West escalates, Goldman Sachs Group Inc. said in a Feb. 22 report. The bank forecasts Brent crude will average $127.50 over the next year.

Additional Cargoes

While the U.S. and its allies seek to persuade the biggest buyers of Iran's oil to scale back imports, the Persian Gulf nation is offering additional cargoes on revised terms to some customers. Indian refiners have yet to decide whether they will take up Iran's offer of additional shipments, three people with knowledge of the talks said Feb. 21.

Iran said Feb. 19 it will stop sales to French and British buyers in retaliation for an EU ban on its crude, the Shana oil ministry news website reported, citing Alireza Nikzad Rahbar, a ministry spokesman. EU nations bought a combined 18 percent of Iran's exports of crude and condensates, or 452,000 barrels a day, in the first half of 2011, according to the EIA. French and U.K. purchases amounted to about 60,000 barrels a day.

Japan, Iran's second-biggest buyer after China, may cut purchases by about 11 percent annually to win exemption from a U.S. law that would punish banks that do business with Iran, according to a Japanese government official who declined to be named because the talks are continuing. Japan's imports of Iranian crude fell in January to an average of 344,532 barrels a day, down 12 percent from a year earlier, according to data yesterday from the Ministry of Finance.

Unipec Reduction

China International United Petroleum & Chemical Co., the nation's largest oil trader, last week agreed to most terms of a delayed 2012 crude-supply deal with Iran, according to three people with knowledge of the negotiations. The company, known as Unipec, will buy about 15 percent less this year, according to a person with knowledge of the deal.

Even after taking into account reduced sales to the U.K., France and China, the gains in oil prices would still translate to an 8 percent increase in Iran's revenue, or $19 million a day, according to Bloomberg calculations.

"We don't think the EU sanctions will work effectively," said Kwan, who says prices may rise as high as $200 a barrel if there is a military conflict. "There are many ways that Iran can monetize its oil wealth in exchange for hard currencies. All these sanctions are just part of a big political theater."

--With assistance from Christian Schmollinger in Singapore and Chua Baizhen in Beijing. Editors: David Marino, Alexander Kwiatkowski

To contact the reporters on this story: Paul Burkhardt in New York at [email protected]; Ramsey Al-Rikabi in Singapore at [email protected]

To contact the editors responsible for this story: Alexander Kwiatkowski at [email protected]; Dan Stets at [email protected]