Iranian Sanctions Can Proceed

Jim Brown
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The EIA produces a report for President Obama every 60 days on inventories and supplies as part of the pending Iranian oil sanctions on July 1st. That report for March and April showed supplies building.

This should come as no shock to readers as I have been laying out the inventory situation for several months now. What the EIA did say in this report was that global supplies currently exceeded demand by about 500,000 bpd in April. This should not be a surprise. This is the typical seasonal inventory building period ahead of the summer demand season.

What it does say is that the Iranian sanctions can proceed as planned assuming the numbers continue to stay in that range. The president has an out if gasoline prices begin to reach a level that is uncomfortable for his election campaign. The sanctions signed in December require enough supplies to prevent the negative impact of high prices. If fuel prices were to move over $4 per gallon he could postpone the sanctions until after the summer vacation season.

The report said the sanctions and pending EU embargo had already cut 400,000 bpd off of Iran's exports. The EIA also said Iran's output is slowing because of their inability to acquire replacement production equipment as a result of the financial sanctions.

The EIA report did say that oil supply problems from other countries would have to be factored into the decision to proceed with the sanctions. June 28th is the earliest date the U.S. can actually apply sanctions to countries and firms still doing business with Iran.

Regardless of any tightening of supply the administration is not likely to ease up on the sanction program until after the scheduled May 23rd P5+1 meeting with Iran over their nuclear enrichment. The administration will want Iran to believe the sanctions are coming and the damage will be severe.

Brent prices weakened early last week when the Iranian envoy to Moscow said Iran is examining a Russian proposal to halt its nuclear work in order to avert new EU sanctions. Just remember, talk is cheap and Iranian talk is worthless. Ambassador Mahmoud-Reza Sajjadi said Iran needed to study the proposal and its implications. That is code for "how much time can we buy with our study process."

The EIA said global production of "liquid fuels", which included oil, NGLs, etc, averaged 88.7 mbpd in April. That is 2.4 mbpd higher than the year ago average of 86.2 mbpd. It is also 2.6 mbpd higher than the three year average of 86.1 mbpd. Of course that three year average contains relatively low numbers from the initial recession rebound.

During April the EIA estimates global consumption of liquid fuels averaged 88.2 mbpd. That is 900,000 bpd over the year ago period and 1.6 mbpd more than the three year average.

The key point there is that production was 500,000 bpd more than demand and that included the 400,000 bpd decline in Iran. The EIA estimated that Iran produced 3.9 mbpd and consumed 1.7 mbpd leaving 2.2 mbpd for export.

The EIA estimates that production of petroleum products in countries other than Iran averaged 82.9 mbpd. That is 3% or 2.8 mbpd higher than the three year average (2009-2011). At the same time consumption of products in countries other than Iran was 84.7 mbpd. That is a long way around to determine what Iran is producing/consuming but Iran does not share their info so it has to be derived from creative research.

In an interesting side note the EIA said the estimate of the 500,000 bpd inventory build INCLUDED inventories in Iran since their inability to sell oil was increasing their inventory levels. This is a strange conclusion since the idea behind the report is to determine how much extra oil there is available in the world market if Iran is no longer a part of the world market. It makes no difference to me if Iran has 100 million barrels in storage if they can't sell it. That number has no impact on global supplies. Obviously this was a government produced report.

The EIA still believes there is roughly 2.5 mbpd of spare capacity and they rightly believe the vast majority of that capacity is held by Saudi Arabia. Whether Saudi actually has that "claimed" capacity is another story. The report also cautioned that only "OPEC" has any spare production capacity.

That spare capacity is lower than the 3.5 mbpd average in 2009-2011 and 3.6 mbpd in 2011. They did footnote the numbers with the disclaimer "spare capacity must also be considered in the context of geopolitical uncertainties, including, but not limited to the situation in Iran. Duh!

Note the decline in spare capacity since 2009.

EIA Global Spare Capacity Estimate

The report also highlighted "unplanned" outages to non-OPEC production of more than 1.2 mbpd in March and were estimated to remain at an elevated level in April. South Sudan had 300,000 bpd offline. Canada's oil sands production declined -300,000 bpd as a result of maintenance. Yemen and Syria lost production due to internal violence. In the North Sea the gas blowout at the Elgin platform cut 40,000 bpd. Unplanned maintenance at the Valhall platform also shut in production. Repairs at the Buzzard field due to a fire halted production of 200,000 bpd. There were also shutdowns in China because of a leak at a Conoco/CNOOC platform and a production halt at the Frade field in Brazil because of two leaks at a Chevron operated rig. Australian production was also halted temporarily due to cyclones.

EIA Chart of Unplanned Disruptions

The EIA also blamed some of the excess crude oil inventory in the USA and Europe on the fourth warmest winter on record. Demand for heating oil was minimal. Normally users take advantage of low prices in the spring to replenish inventories. However, because of the high prices for oil/heating oil that replenishment cycle did not occur. This suggests there will be increased demand in the fall when the heating oil season approaches.

The EIA said last week the unusually high crude oil inventories could also be caused in part by the pending startup of the Motiva refinery in Port Arthur Texas. The 325,000 bpd expansion is a joint venture between Saudi Aramco and Shell. The expansion will raise the total capacity to 600,000 bpd and make it the largest refinery in the USA. Shell reported the refinery expansion had begun operations last week. That much capacity would have required a significant buildup in crude inventory ahead of the start of operations. The five year expansion project cost $7 billion.

The EIA said despite the numerous refinery closings over the last year the capacity additions like the upgrade to Motiva kept the global capacity more or less flat in 2011. There was no estimate for 2012 and that is when most of the closings were to take place.

EIA Refining Capacity Chart

Jim Brown

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