Iran Oil Slows as Price Concerns Rise

WSJ.com -- Iran's oil exports appear to have dropped this month as buyers prepare for tough new sanctions, market observers say, and shipments are likely to shrink further if President Barack Obama determines by Friday, as expected, that markets can adjust to fewer barrels of Iranian oil.

By the end of March, with three months until a European Union embargo on Iranian oil takes effect, Iran's exports are expected to fall by about 300,000 barrels a day from last month, to 1.9 million barrels daily, a nearly 14% drop, according to Swiss oil-shipping specialist Petro-Logistics SA.

More aggressive measures are in the pipeline, U.S. congressional leaders and the EU say. Sanctions intended to bring Iran's nuclear program to heel could eventually leave half of Iran's oil output cut off from international markets, according to analysts and officials.

But Iran could hold off on any nuclear compromise, betting that sanctions will push oil prices so high that the country's income will hold steady—while fragile Western economies wrestle with higher energy costs.

U.S. sanctions that aim to cut off Iran's central bank, the clearing house for all of Iran's oil sales, will take effect at the end of June if Mr. Obama doesn't make an unexpected move at his Friday deadline and choose to block the measures. The EU boycott will take effect at the same time, though European buyers have already started cutting back.

The oil market has absorbed rapid supply drops before—most recently when Libyan production suddenly halted when fighting broke out last year—but rarely without seeing prices rise.

Rhetorical sparring between Iran and the West has already helped to push oil prices higher this year. Mounting fears of Iranian disruptions have sent the price U.S. motorists pay at gasoline pumps closer to $4 a gallon. Oil prices were down 1.79% in New York on Wednesday, closing at $105.41 a barrel, after rising for three days of trading.

Analysts and the U.S. Energy Information Administration say the oil market has a small cushion of excess capacity, most of it in Saudi Arabia.

Some observers worry that oil prices could rise further if Iranian oil comes off the market faster than it can be replaced by other sources, and as the Saudi cushion of spare supply shrinks. "The pain is yet to come, in my view," said Trevor Houser, a partner in Rhodium Group, a private oil-market analyst.

The sanctions trade-off from the perspective of the West—how much less Iran earns compared how much more Western consumers pay—depends largely on what happens to oil prices.

Iran could receive between $1.4 billion and $3.9 billion a month less than if there were no sanctions, depending on how comprehensively Iranian oil exports are shunned, Rhodium Group calculates.

The amount would be equivalent to 1.4% to 3.8% of what Iran was expected to earn from oil and gas exports in the financial year that ended this year, based on estimates by the International Monetary Fund.

Global oil prices might climb between $5 and $14 per barrel, leaving oil consumers paying between $14.7 billion and $36 billion more, because of concerns that global spare capacity is shrinking, Mr. Houser says.

With oil prices rising steadily—they are up 6.66% this year in New York—Iran could still wind up with almost as much money as it did last year, despite the sanctions, according to the calculations.

Without sanctions, Iran's revenue would climb by $1 billion this year, Mr. Houser figures.

Mr. Obama, however, is looking at an Energy Information Administration report issued in February that attributes tightness in the oil market to multiple factors, not only Iranian supply cutbacks.

Some of Iran's once-reliable customers, such as Japan, have sharply reduced their purchases in recent months and plan to cut back further. Iranian crude exports to India, meanwhile, rose 37.5% in January from December.

And while China, traditionally Iran's biggest customer, has bought significantly less this year because of a commercial dispute unrelated to sanctions, Chinese oil traders say they expected it to purchase more in the coming months.

Write to Bill Spindle at [email protected] and Benoît Faucon at [email protected]
Adjustments

Iran oil exports have slowed to most countries—besides India

China's February imports fell 40% from last year (because of pricing dispute)

Japan saw a 12% drop in January from a year earlier

South Korea cut purchases 14% from a year earlier in January-February

Spain's imports of Iranian crude fell by 37% in December on a monthly basis

France stopped all Iranian oil imports late 2011

India lifted imports by 37.5% in January from December
—Sources: country data and WSJ research

A version of this article appeared Mar. 29, 2012, on page A10 in some U.S. editions of The Wall Street Journal, with the headline: Iran Oil Slows as Price Concerns RiseTides of Change.