Exports of West African oil are on the rise, but no substitute for Iran.
Exports of West African oil are on the rise, with Asian nations increasing supplies from the region. According to a recent report by Reuters, China, India, Indonesia, Taiwan and others in the region bought an average of 1.74m barrels of oil per day from west Africa for first nine months of 2012, up about 8 per cent from the same period a year ago.
The 2012 figures represent an overall record for the region, the reports states, with exports to Asia rising more than 50 per cent over the last five years to meet growing demand. The reasons for the demand, however are not entirely clear cut. Is this a response to Iranian sanctions, as suggested?
The report asserts that Asian nations are turning away from Iranian oil and substituting west African crude due to US and European sanctions. But several industry experts disagree, saying that China is not turning away from Iranian oil by any means, despite the growth in the west African market.
“China got a wavier from the US and extracted significant concessions from Iran”, said David Kirsch, managing director of research and advisory of Energy Intelligence, a US and UK-based energy information firm. It is believed the concessions from Iran could be as much as $10 per barrel.
“West African crude oil isn’t a good substitute for Iranian crude oil”, Kirsch says, explaining that west Africa’s oil is lighter and sweeter than Iran’s, heavy, sour oil. Therefore there’s a demand for both: China was also a strong buyer of Iranian crude in June, when the numbers went up for west Africa exports.
The Reuters reports states China took a little more than 1m bpd from the region that month, with that figure dropping to about 858,000 bpd in August.
Kirsch says the China’s oil buying habits are often “lumpy”, with many ascribing the peaks and valleys to internal economic reasons such as currency controls. “I think the Chinese have become more sophisticated in managing their inventories,” he said. When they turn away from Iran – often over higher prices – Chinese refiners look to countries such as Iraq, Russia and Venezuela.
Platts, the New York-based energy and metals information provider, recently reported that Japanese refiners are expected to load 5.6m barrels of Iranian oil in August – the first since late July – following a “clearing of concerns” over the loss of “European Union-linked protection and indemnity insurance cover for ships carrying Iranian oil.”
A new law came in effect in late July to compensate Japanese buyers of Iranian oil for the expected loss of protection and insurance cover, Platts reported. Two South Korean tankers are also expected to begin loading Iranian crude next month, the service reported.
“The Iran angle is more of a Western media insert into this equation as part of the ongoing attempt to hit home the point that sanctions against Iran are working”, says Michael Bagley, president of Jellyfish, a US-based intelligence and security firm. He says the stats have more to do with China looking to shore up ties in the region before the west does.
Regardless of the reason, the overall trend is that there will be always be demand for west Africa’s, light, sweet crude because it’s of high quality, said Kirsch.
Currently there’s less demand for high quality crude than for heavier crude.
“That’s the usual market dislocation”, he says. “In the longer-term, west African oil will find a home in the market”.