-Clyde Russell is a Reuters columnist. The views expressed
are his own.-
By Clyde Russell
LAUNCESTON, Australia, July 2 Events seldom
unfold in isolation and the recent surge in sectarian violence
in Iraq appears to be leading to some shifts in Asian crude oil
Two things stand out as recent developments; firstly the
increasing supply from Iran and secondly the reduction in the
official selling price of Saudi Arabia's main crude grade for
While neither may be directly linked to the startling
advances of militant Sunni fighters in Iraq, they show that
crude markets will subtly do what is necessary to ensure energy
needs are met.
Iranian crude exports were 1.21 million barrels per day
(bpd) in June, down from 1.33 million bpd in May, according to
sources that track tanker movements.
Notwithstanding the small drop in June, Iran is shipping
considerably more crude than the 1 million bpd permitted under
an agreement between Tehran and the six world powers negotiating
a deal to limit Iran's nuclear programme.
China, Iran's biggest buyer, certainly hasn't held back in
taking cargoes, with May imports rising 36.4 percent from a year
earlier to 757,900 bpd.
And it's not just China. India, Japan and South Korea all
have increased oil purchases from Iran.
For the first five months of 2014, imports by Iran's top
four buyers averaged 1.25 million bpd, up 25.3 percent from a
The numbers show that the 1 million bpd ceiling is being
widely ignored, and the lack of action from the Western powers
suggest that they aren't overly concerned.
The possibility, or perhaps even likelihood, of Iraq
splitting along sectarian lines is suddenly a larger problem for
the West than Iran's disputed nuclear programme.
While the bulk of Iraq's oil exports are in the south of the
country, which is still under the control of the government of
Shi'ite Prime Minister Nuri al-Maliki, there is concern among
crude buyers about the potential for disruption.
Iraq is now very much at risk of becoming a failed state,
characterised by ongoing conflict between a Shi'ite government
in the south, a militant Sunni group in the north and a Kurdish
breakaway state in the east.
While this scenario is by no means certain, what is certain
is that oil refiners prefer stability and security of supply,
and will thus turn to Iran over Iraq.
This doesn't mean they won't buy Iraqi oil, but it does mean
they will seek to lower their reliance on it, and may prefer to
buy it through third party traders on a spot basis, thus
mitigating risk to themselves.
SAUDI PRICE CUT
The decision by Saudi Aramco, the world's largest oil
exporter, to lower the premium for August cargoes of its
benchmark Arab Light grade is probably not a direct result of
Iraqi instability, but more likely a side-effect.
The Saudi state producer cut the August official selling
price (OSP) of Arab Light to Asian refiners to a premium of
$2.05 a barrel over Oman/Dubai, down from $2.25 for July.
The OSP tends to reflect moves in the Brent-Dubai spread,
which has narrowed recently, with the exchange for swaps
DUB-EFS-1M dropping to $4.17 a barrel on Tuesday, down from
$4.96 on June 13, which was the highest for nine months.
But it's worth noting that when the Brent-Dubai spread was
around these levels in the fourth quarter of last year, the
Saudi OSP was higher, being $3.40 a barrel in October and $3.20
This suggests the Saudis are keeping their OSP slightly
lower in order to ensure sufficient supply for Asian refiners,
who buy about two-thirds of Saudi Arabia's crude exports.
What the increasing Iranian exports and lower Saudi OSPs
show is that the crude market is adjusting to the threat posed
by the conflict in Iraq in a measured way.
While oil prices have gained since the Iraqi flare-up, with
Oman futures rising 3.8 percent from June 6 to July 1,
the shape of the curve <0#OQ:> hasn't dramatically altered.
The backwardation has eased slightly, with the front-month
contract currently 1.9 percent higher than the six-month, down
from 2.6 percent a month ago.
This shows a little bit of a risk premium has been added to
future oil deliveries, but not so much as to suggest the market
is in any way concerned about the availability of supplies.
(Editing by Himani Sarkar)