Through a combination of somewhat fortuitous factors, the imminent imposition of Western sanctions on Iran is shaping up as a bit of a non-event for Asian crude buyers.
The US and European measures that start late this month and next aim to halt Iranian shipments of oil to Europe and impact those to the rest of the world by limiting the ability to pay or insure cargoes.
But far from being a major worry for Asia, replacing much of the about 1.5 million barrels day that the region used to buy from Tehran has been fairly easy.
Fortuitous factor number one is Greece, or more specifically the economic woes in Europe caused by the ongoing sovereign debt crisis that is at its worst in the Mediterranean nation.
There is some irony insofar as a weakening economic outlook has actually helped Europe achieve its aim of keeping oil prices under control even as it plans to shut off imports from Iran, which totalled 740,000 barrels a day last year.
It is probably a moot point as to whether Europeans would prefer a stronger economic outlook and Brent crude near the $130 a barrel mark it neared in March, or the current weaker prognosis and Brent at its present level just under $100.
But what is certain is that the fear over the oil supply-demand balance because of the likely loss of much of Iran’s 2.3 million barrel a day export capacity has largely dissipated.
Fortuitous factor number two is the faster-than-forecast slowing in China’s economic growth rate, which is manifesting itself in weaker commodity imports.
Chinese crude imports were robust in the first quarter, with each month above 23 million tons, a level higher than the previous record high in September 2010.
Imports eased in April to 22.26 million tons, and are likely to slip further in the next two to three months on lower refinery runs and softer demand growth.
Again, it’s unlikely that the world economy is better for the slower growth rate in China, but there is little doubt that economic concerns have replaced supply concerns as far as crude markets are concerned.
And herein lies the risk for crude markets. It seems that oil prices have become less reliant on the old supply and demand fundamentals and more linked to the prevailing global economic outlook and sentiment.
And sentiment can swing quite dramatically: look at the swift changes in directions for equity prices based on little more than news headlines following every twist and turn of the Greek debt crisis and its implications for the euro zone.
What this means is that the factors that drove Brent below $100 are purely serendipitous and can easily reverse over the rest of the year.
If one assumes that Europe will, at the least, be able to manage its crisis and that the Chinese authorities can successfully re-ignite growth in the second half of 2012, it’s also reasonable to assume that oil prices will rise as well.
But in the meantime the loss of Iranian cargoes isn’t the problem that many feared it would be, with buyers able to source alternative supplies.
Purchases from South Korea, which bought about 230,000 barrels a day of Iranian crude last year, will probably drop to zero after July, according to industry sources.
Japan has also curbed its purchases and is struggling to arrange insurance cover for cargoes due to the EU ban on reinsurers based in the continent from providing coverage.
China remains the best hope for Iran to maintain a customer in Asia, given Beijing’s opposition to sanctions, but even the Chinese are struggling to arrange insurance and payment for cargoes.
However, assuming European imports from Iran do stop altogether after July, Iran is likely to be able to export about half of daily capacity.
This represents a revenue loss of about $115 million day, or about $20 billion for the second half of 2012.
Whether this is enough to force the Iranians to compromise over their nuclear program remains to be seen.
If Tehran does reach an agreement in talks with the US, France, Britain, Germany, Russia and China, and Iranian oil flows again in the second half, it would most likely result in an oversupply of crude, perhaps just in time to meet returning Chinese demand. from arab news.