SINGAPORE The United States may have missed its moment to apply more political pressure on governments to stop buying Iranian crude as rising fuel prices make Washington wary about further interruptions to the global supply chain.
U.S. leverage has waned after the civil war in Libya virtually halted the north African country's crude shipments, highlighting risks to Arab exports from unrest across the region.
That has thrown oil markets off balance, sending Brent crude to a 32-month high above $127 a barrel in April and boosting American gasoline pump prices to near $4 a gallon.
Asia's fastest-growing oil consumers, the main buyers from Iran, are more than ever prioritizing security of supply given that spare capacity is limited.
"Over the last two months, the instability in the Arab oil-exporting countries has created a very strong incentive for the major Asian oil importers to reconsider doubts, if any at all, about dealing with Iran," said Hooman Peimani, head of the energy security division at the Energy Studies Institute of the National University of Singapore.
"Prior to that, there were many suppliers that India and China could potentially consider to decrease imports from Iran, at least to some extent. That time is already gone."
India, involved in an oil payments row with Iran, has prevented the dispute from escalating and cutting oil flows from the Islamic Republic, a blessing in disguise for consumers reeling from crude's rally.
As top exporter Saudi Arabia attempted to compensate for Libya's outage, global spare production capacity shrank, at times becoming the thinnest in more than two years. That took away the supply cushion that would have served to calm markets if an escalation in U.S. pressure resulted in a disruption to Iran's shipments.
Moreover, U.S. President Barack Obama is now feeling the heat from high gasoline prices, complicating any initiative that would further curtail oil supplies from major producers. Obama is unlikely to risk a further run up in prices triggered by a disruption to Iran's output.
INDIA STANDS UP
For Indian refiners, security of supply has taken precedence over any other consideration since revolutions in Tunisia and Egypt, the war in Libya and social unrest from Morocco to Oman highlighted the risk of disruption to energy flows from the Middle East.
"When you are frantically looking for suppliers and you have one who has been supplying to you for a long time, you don't want to lose that source," said Praveen Kumar, senior consultant at FACTS Global Energy in Singapore.
"People who have traded with Iran will continue, especially in this high price environment, because there is the security of supply. They don't have a plan B."
Flows of Iranian crude to Indian state-owned refiners and privately held Essar continued smoothly in April, when shipments were at risk as payments for January cargoes fell due.
India's oil ministry has been in talks with the finance ministry to resolve the payments row. Iran's semi-official news agency last week said the country had secured the release of some funds that India paid for Iranian crude and had been frozen in Germany.
The dispute erupted in December after India's central bank scrapped payments through the Asian Clearing Union (ACU), winning praise from Washington.
Iran is the second-biggest supplier of crude to India after Saudi Arabia and its heavy grades require costly upgrading units. Refiners in India have invested heavily to extract the additional margin from converting low-quality crude into high-value products.
India's oil deals with Iran are worth about $12 billion a year and run from April to March. Oil exports from Iran, OPEC's no. 2 producer, to India, Asia's third-largest buyer, total about 400,000 barrels per day, a fifth of Tehran's sales abroad.
Analysts and oil traders expect the two countries to resolve the issue on a long-term basis, given the large volume and value of the crude at stake and the difficulties Indian refiners would face in finding alternative supplies.
"There is an extent to which the U.S. will push countries in south Asia but at the end they will try to work something out themselves," said Kumar at FACTS.
Until the wave of protests and revolt changed the face of politics in the Middle East and North Africa, the India-Iran oil dispute gave a hint of how oil trade routes and relationships would be redefined if politics rendered buying Iranian oil more difficult.
Iran's immediate option would be to start storing the oil in tankers until Tehran found an alternative market or route to get rid of supplies.
"If refiners want Iranian oil, they will get it through a trader," said Manouchehr Takin, a senior petroleum analyst at the Center for Global Energy Studies in London. "Of course it would be at a cost to the Iranians, and they would probably have to do a discount."
Iran could also resort to offering crude in a barter exchange for gasoline that it normally imports, obviating the need for a payments mechanism, another trader said.
Discounted oil would be especially attractive for Chinese refiners with stakes in Iran's oil industry.
Chinese firms including CNPC and CNOOC are set to develop some of Iran's prize energy assets, such as the South Pars gas field and the Azadegan and Yadavaran oil fields.
In a latest sign of efforts to discourage Beijing from doing business with Iran, the U.S. collaborated with Saudi Arabia to increase oil supplies to China at the expense of the Islamic Republic, U.S. diplomatic cables show.
But China, the top buyer of Iranian crude, has renewed its annual import pacts for 2011, keeping volumes steady at some 460,000 barrels per day (bpd).
Sinopec's Zhenhai plant, which is among the top processors of Iranian grades, sources about a third of its 430,000 bpd throughput from the Islamic Republic.
"If prices are attractive... we have the processing capacity to handle more Iranian crude," said an official at Zhenhai.
A trader at a Chinese state-oil firm said that as long as the Chinese government allows it, and "as long as prices are good, why not" take more Iranian crude.
(With additional reporting by Nidhi Verma in New DELHI and Chen Aizhu in BEIJING; Editing by Simon Webb and Manash Goswami)