Putin gains from Iran’s oil pain

FuelFix.com – Sanctions on Iran are bolstering oil revenues for its ally Russia as refiners seeking replacement supplies trigger the biggest rally in Urals crude since President Vladimir Putin first came to power.

Urals, the benchmark export grade of the world’s biggest oil producer, surged by $1.35 a barrel last week, its steepest advance since September 2000. The European Union, Iran’s largest customer after China, halted imports from the Islamic republic four days ago in an effort to contain its nuclear program, requiring buyers in the region to source high-sulfur, or sour, crude from other producers such as Russia.

“Sanctions on Iran are definitely a major factor behind the uptick in Urals and that’s probably set to continue,” Eugene Lindell, senior crude analyst at Vienna-based consultants JBC Energy GmbH, said Wednesday. “If you have a shortage of Iranian oil, there aren’t so many crudes you can ideally replace it with.”

The European embargo on Iran, in conjunction with tougher measures by the United States, is leading to spiraling costs for meat and other staples in the nation’s bazaars amid a 50 percent plunge in the nation’s currency, the rial. At the same time, the rising value of Urals crude may soften the blow of falling global oil prices for Russia, where Putin faces the most serious protests of his 12-year rule.

Russia, a supplier of weapons to Iran until two years ago, has criticized the EU sanction, defended Iran’s right to pursue a civilian nuclear program and argued for the involvement of the Islamic republic in talks to resolve the conflict in Syria.

European refiners may need to replace as much as 750,000 to 900,000 barrels a day of Iranian crude in the summer months, when demand jumps as plants start after maintenance, JBC’s Lindell estimates. The Persian nation’s Foreign Ministry described the boycott as a threat to national security on July 3 and 100 lawmakers in Iran’s parliament signed a draft bill that may authorize blocking the Strait of Hormuz, potentially blocking 20 percent of the world’s daily oil flows.

“Iran is certainly a factor, but refineries have stockpiled Iranian barrels ahead of the sanctions,” according to Ehsan Ul-Haq, a senior consultant at KBC Energy Economics, a researcher based in Walton-on-Thames, England. “Iraq has been boosting its production and because Iraq also produces medium- sour crudes, Iraqi barrels are able to replace Iranian barrels.”

Rising demand for Russian crude is also attributable to its higher yield of fuel oil, used for powering ships and firing power stations, according to Ul-Haq. “Very tight” global inventories of fuel oil are being stretched as the Middle East’s need for air conditioning surges in the summer months, he said.

“A cocktail of bullish factors helped push Urals values higher,” including the rebound in refinery profits and the cancellation of several shipments from the Black Sea port of Novorossiysk, analysts at JBC Energy said in a July 2 report. “Over the coming months, we expect the European sour crude market to retain its current strength.”

Urals supplies have also been curtailed by the cancellation of at least three cargoes that were scheduled to be shipped this month, loading data show. The three lots amounting to 340,000 metric tons belonged to TNK-BP, the Russian producer half-owned by BP, according to three people with knowledge of the shipping schedule. They declined to be identified because the information is confidential.

While Iraqi output has increased this year, “political bickering” between the central government in Baghdad and the semi-autonomous Kurdistan province in the north are constraining flows through Iraq’s export pipeline, reaffirming the importance of Russia for European customers, according to JBC’s Lindell.

“It’s not the volume of Iraqi crude itself but the reliability,” Lindell said. “If you send a tanker down there to pick it up, it may end up getting delayed.”

Brent crude, used to price more than half the world’s oil, has plunged about 20 percent from this year’s peak of $128.40 a barrel on March 1 as Europe’s debt crisis outweighs concern that the ban on Iranian oil will constrain global supplies Futures for August settlement gained 2.4 percent to $102.14 a barrel today on the London-based ICE Futures Europe exchange.

Brent’s drop may erode revenues for Russia, where the energy sector contributes about 50 percent of state income. The ruble fell to a three-year low against the dollar on May 31. The hardship may be tempered as Europe’s increased reliance on Russia while it searches for alternatives to Iranian supplies bolsters the cost of Urals.