A European Union ban on the purchase of Iranian oil that
comes into full force Sunday will be greeted with little fanfare by European
customers.
Many refiners have already turned to alternatives, and other countries,
particularly Saudi Arabia but also Iraq, have increased production. The increased
output comes as the euro zone's crisis dents oil demand. That has left Europe's
refiners well-positioned to weather the July 1 cutoff in Iranian supplies.
"We've seen continuing slowdown in demand, and Saudi Arabia has provided
extra oil, and it has removed worries," said Ole Hansen, futures manager
on Saxo Bank's fixed-income trading desk.
Oil prices soared to $128.40 a barrel earlier in the year, primarily because of
concern that the loss of Iranian crude could cause large shortages in the
market and put pressure on some of the region's most fragile economies, such as
Greece, Spain and Italy.
Before the sanctions, Iran was among the European Union's top energy suppliers.
The bloc imported 600,000 barrels a day of Iranian crude before the sanctions
were ratified in January, according to the International Energy Agency. Companies
with long-term contracts were allowed to keep importing until the end of June.
But Thursday, just days ahead of the July 1 deadline, the price of Brent crude
futures closed at $91.30 a barrel. Market participants say concerns over the
state of the global economy outweigh any worries about supply.
The IEA's latest projections for this year peg European oil demand at an
average of 14.7 million barrels a day, compared to 15 million barrels a day
last year and 15.3 million barrels a day in 2010.
Analysts say a large price move following the start of the embargo on Sunday is
unlikely, adding that a large proportion of Iran's oil output would still be
able to reach Asian buyers. Many of these countries have received exemptions
from international sanctions barring dealings with Iranian financial
institutions that make it difficult to pay for the country's oil.
Indeed, many European refiners have already done without Iranian crude for
several months. Some preferred to wind down their dealings with the Iran well
in advance of the full embargo, leaving the market well prepared for what is to
come.
Greece, which kicked up strong opposition to the sanctions in January, stopped
buying Iranian oil "a few months ago," a Greek government official
said Tuesday, while Spanish refiner Repsol YPF SA said it hasn't bought any of
the country's crude since January.
Prior to the sanctions, Spain and Greece were the two largest European
importers of Iranian crude, although Italy also imported significant amounts of
the country's oil.
A person familiar with crude buying by Cepsa, another major Spanish refinery,
said Tuesday the company had stopped its imports of Iranian oil several weeks
ago. Eni SpA, Italy's largest refiner, received an exemption to allow it to
keep getting oil shipments as payment for work it had done in Iran, but a
spokesman said it isn't receiving any other Iranian crude.
Other small refineries in Italy said they had made plans to stop receiving
Iranian crude next month. Market participants said the market is unlikely to
come under strain as these companies seek alternative sources. Refiners and
crude traders said that in addition to buying from Saudi Arabia and Iraq, consumers have also turned to Russia to
replace Iranian supplies.
The comfortable supply picture has helped remove the premium of around $20 a
barrel that traders factored into oil prices at the beginning of the year, said
Torbjorn Kjus, oil-market analyst at DnB NOR.
"There's no material price premium from the Iran issue," he said.
However, analysts said, the loss of Iranian crude could begin to strain the
market if the global economy strengthens or tensions in the oil-rich Middle
East escalate.
"Refiners have replaced Iranian oil, but we will see tightness if demand
increases," said Amrita Sen, oil analyst at Barclays. "We haven't
seen it yet as demand has been weak for several weeks now."