American sanctions have been re-imposed on Iran on May 8, 2018, four days ahead of President Trump’s deadline of May 12, 2018. The move spurns America’s traditional close relationship in foreign affairs with the EU and swerves towards Saudi Arabia’s capitulations and Israel’s strategic spooking. It also provides Trump with a certain amount of populist support domestically.
Worries over U.S. sanctions on major oil producer Iran propelled crude prices past $80 a barrel on the 17th May 2018. Crude oil prices jumped on the initial announcement, rising to their highest level in four years, with the WTI past US$70/b. Asian countries are set to feel the pinch as their oil consumption bill reaches $1 trillion as crude prices break through $80 per barrel, Reuters reports.
With all pre-JCPOA sanctions now in place by the US, American has given international firms 3-6 months to wind down all purchases of Iranian crude. This coincides with the current wind-down schedule of the OPEC/NOPEC production freeze deal, which could allow members like Saudi Arabia to raise production at the expense of curbed demand for Iranian crude. But sailing is not smooth. A European pushback has begun, with a likely response being an EU-wide blocking statute that would effectively allow EU companies to ignore US sanctions. And even if that doesn’t work, China and India have far more clout than they did in 2012, with Iran already announcing that China’s CNPC will take over if France’s Total is compelled to exit the South Pars gas project. French oil major Total has recently announced that it will not be able to continue with the contract related to the South Pars 11 (SP11) project unless it gets a waiver protecting it from U.S. sanctions after the Trump administration pulled out of the nuclear deal.
The US has once again left the door open for countries to seek ‘significant reduction exceptions’ from the sanctions – a clause introduced during the initial 2012 sanctions that allowed countries, mainly Asian nations, to keep receiving Iranian crude. Back then, the waiver was reviewed every 180 days; there is no reason not to expect a similar policy this time, which would allow key buyers like Japan, South Korea and China to keep their Iranian crude volumes flowing. The developing EU rebellion against US moves will also severely diminish effectiveness – sanctions are only successful when supported in majority, and it increasingly appears that the US is going to be a lone wolf this time round.
The main question also remains – what is the end-game? Iran is already in compliance with the JCPOA according to the United Nations, so what does Trump hope to push Iran to achieve beyond what has been agreed and actually implemented? Increasingly, this seems like another attempt undo agreements signed off by the previous Obama administration. Crude bulls, however, should be happy for now.
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Headline crude prices for the week beginning 15 October 2018 – Brent: US$81/b; WTI: US$71/b
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Less than two weeks ago, the VLCC Navarin arrived at Tanjung Pengerang, at the southern end of Peninsular Malaysia. It was carrying two million barrels of crude oil, split equally between Saudi Arab Medium and Iraqi Basra Light grades.
The RAPID refinery in Johor. An equal joint partnership between Malaysia’s Petronas and Saudi Aramco whose 300 kb/d mega refinery is nearing completion. Once questioned for its economic viability, RAPID is now scheduled to start up in early 2019, entering a market that is still booming and in demand of the higher quality, Euro IV and Euro V level fuels RAPID will produce.
Beyond fuel products, RAPID will also have massive petrochemical capacity. Meant to come on online at a later date, RAPID will have a collective capacity of some 7.7 million tons per annum of differentiated and specialty chemicals, including 3 mtpa of propylene. To be completed in stages, Petronas nonetheless projects that it will add some 3.3 million tons of petrochemicals to the Asia market by the end of next year. That’s blockbuster numbers, and it will elevate Petronas’ stature in downstream, bringing more international appeal to a refining network previously focused mainly on Malaysia. For its partner Saudi Aramco, RAPID is part of a multi-pronged strategy of investing mega refineries in key parts of the world, to diversify its business and ensure demand for its crude flows as it edges towards an IPO.
RAPID won’t be alone. Vietnam’s second refinery – the 200 kb/d Nghi Son – has finally started up this year after multiple delays. And in the same timeframe as RAPID, the Zhejiang refinery by Rongsheng Petro Chemical and the Dalian refinery by Hengli Petrochemical in China are both due to start up. At 400 kb/d each, that could add 1.1 mmb/d of new refining capacity in Asia within 1H19. And there’s more coming. Hengli’s Pulau Muara Besar project in Brunei is also aiming for a 2019 start, potentially adding another 175 kb/d of capacity. And just like RAPID, each of these new or recent projects has substantial petrochemical capacity planned.
That’s okay for now, since demand remains strong. But the danger is that this could all unravel. With American sanctions on Iran due to kick in November, even existing refineries are fleeing from contributing to Tehran in favour of other crude grades. The new refineries will be entering a tight market that could become even tighter. RAPID can rely on Saudi Arabia and Nghi Son can depend on Kuwait, both the Chinese projects are having to scramble to find alternate supplies for their designed diet of heavy sour crude. This race to find supplies has already sent Brent prices to four-year highs, and most in the industry are already predicting that crude oil prices will rise to US$100/b by the year’s end. At prices like this, demand destruction begins and the current massive growth – fuelled by cheap oil prices – could come to an end. The market can rapidly change again, and by the end of this decade, Asia could be swirling with far more oil products that it can handle.
Upcoming and recent Asia refineries:
Headline crude prices for the week beginning 8 October 2018 – Brent: US$84/b; WTI: US$74/b
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