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."