OREANDA-NEWS. There is little doubt that additional crude oil supplies from Iran will intensify competition among Middle Eastern producers, which are already fighting to secure their share of Asia’s dynamic markets against the influx of barrels from western hemisphere suppliers that can no longer rely on the US market.

Tehran’s July 14 nuclear deal with six world powers will eventually lead to additional flows of Iranian oil onto world markets, but oil minister Bijan Zanganeh has already said the thrust of the marketing focus will be on Asia, where Iran has been able to maintain a foothold in the four key consuming countries.

China, India, Japan and South Korea (along with Taiwan, whose purchase volumes are negligible, and Turkey) have been able to continue importing  Iranian oil by accepting — in principle, at any rate — a collective volume limit of around 1 million b/d in return for exemption from the US financial sanctions imposed in mid-2012. Some of the buyers in these countries have already said that they will consider boosting purchases from Iran when sanctions are officially lifted.

So, with a potential flood of Iranian oil in prospect, Middle Eastern producers, already challenged by rising supply into Asia from Africa, Russia and even the Americas, appear to be making further efforts to sweeten their sales terms for some customers in the region.

Most of the oil sold into Asia is done on an FOB basis, which means that the buyer charters a vessel to lift the crude from a terminal in the producing country and pays for the cost of shipping the crude to its destination. These FOB barrels are mainly sold under term contracts based on Official Selling Prices, or OSPs, which means that suppliers have little room to differentiate from each other as each producing country’s term contracts are fixed at parity to the OSP for all term customers in the region.

Where suppliers do have room to differentiate is in the areas of freight and credit, and Iran, in particular, has had to be more creative because of the sanctions, which include a ban on the provision of insurance for Iranian oil shipments. So Iran has been supplying oil on a CFR basis to some customers in South Korea, China and India in Asia — in other words, it has been paying the freight costs.

But Tehran is now seeing CFR competition from Kuwait and Saudi Arabia, which, according to industry sources, have begun to offer crude on both a CFR (freight costs covered) and CIF (freight and insurance costs covered) to Asian refiners.

 

An Indian shipbroker who does business with state-owned refiners tells Platts he hears that Middle Eastern state-owned oil companies such as Kuwait Petroleum Corporation and Saudi Aramco have been in talks with Indian state-owned refiners to sell crude on a delivered basis and that these Gulf suppliers are willing to absorb freight costs.

KPC is pushing to sell more crude oil on a CFR/CIF basis to Taiwan’s Formosa Petrochemical as it tries to retain market share, according to a source close to Formosa.

So with increasing competition in areas beyond pricing, what can Iran do to make its oil even more attractive than that of other Middle Eastern producers?

A source close to China’s state-owned CNOOC suggests that Iran could look at offering longer-term credit than its competitors.

According to Iranian sources tracking developments, Iran intends to expand its offers of crude on a CFR basis to Asian customers using its fleet of 42 VLCCs, nine Suezmaxes and five Aframaxes.

But any moves away from FOB-based crude imports could be limited, at least in the short term.

India, with its relatively small fleet of eight VLCCs, appears to be the prime target for CFR offers by Kuwait and Saudi, although there is no approval yet from the Indian government to buy on a CIF basis.

And South Korea, with a fleet of fewer than 30 VLCCs, has also been targeted for CFR-based supply by some Middle East suppliers. But a South Korean refiner has said the company prefers to import FOB because that gives better control of inventory, flexibility in the use of tonnage, and optimization of costs.

“I have heard that many Middle East oil suppliers are trying to sell their crude to South Korean refiners on a CFR basis and willing to subsidize the freight,” a source at a South Korean tanker company said.

Japan may be a tougher market for such deals, given its massive fleet of more than 100 VLCCs. Local refiners would be torn between sticking to their tightly-contracted long-term charter deals with shipowners and thus maintaining tighter control of their own security of supply rather than pursuing what could be more economically advantageous deals.

So the battle for market share continues, and while it may be some time before a clear picture emerges of which are the winners and which the losers among the suppliers. For the time being, though, there seems to be one clear winner — the Asian buyer.