Iran Preparing for Trouble

Jim Brown
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Iran has three supertankers idling in the Persian Gulf, two more on the way and several others in a holding pattern elsewhere on the globe. Are they preparing for a problem or just positioning for the slow season in demand?

With Iran rattling their sabers today with multiple news events they could be preparing for trouble ahead. Iran has stored oil on tankers in the past so this is not earth shaking news but is this time different? Iran has three VLCC super tankers idling in the gulf and from their depth in the water it appears they are loaded with Iranian crude. These are two-million barrel capacity tankers so that represents about six million barrels.

The 1,100 foot Haraz arrived on Jan-2nd, the Najm on Jan-4th and the Huwayzeh on Jan 10th. Two other ships, the Dagar has been in the vicinity since Jan-1st but is currently unloaded and the Honar arrived on Jan-21st also unloaded.

The Iranian tanker Nesa has been off the coast of Malta since December and the Davar off the coast of Benin in West Africa since November. Both of those ships appear to be loaded but not going anywhere.

Iran use 14 tankers two years ago to store oil when purchasers of Iranian crude dried up. The March/April period is typically a low demand period in Japan and they are the largest purchasers of Iranian crude.

Iran is loading tankers as storage just as other banks, hedge funds and speculators are dumping their floating storage as the contango trade evaporates with long dated futures prices coming closer to current spot prices. When the markets are in contango traders can buy spot crude cheaply, store it on tankers and then sell it back into the market using a longer dated futures contract and pocket the difference. When the contango is steep it makes sense but with the contango shrinking those investors have to unload the oil or take a loss. Back in March the futures spread was 12% and that has narrowed to 4% today using six-month futures prices. A 4% margin is not much profit after taking into account storage and delivery charges and this is why speculators are dumping the tanker inventory.

Iran produces a lot of high sulfur crude and refineries that process that crude shutdown in the spring for maintenance. High sulfur refining requires long maintenance cycles because of the additional steps required compared to light sweet crude. It is possible Iran is just planning ahead for those maintenance cycles. Iran does not have enough onshore storage to accommodate the 25 million barrels of unused crude they stored two years ago. They either have to store it offshore on tankers or shutdown production. The discount for Iran's high sulfur crude compared to Oman and Dubai crude widened to 65-cents per barrel on Monday from 41-cents in December.

The rising storage held by Iran may also play a different role. If Iran provokes an attack by Israel or the U.S. with whatever they plan on doing on February 11th then their oil facilities could be damaged in order to deprive them of revenue. Oil stored on tankers could possibly be moved out of harms way quickly and moved to a purchaser and give them a much needed boost in revenue. If we were to see these storage tankers heading out of the gulf this week I would be more concerned that Iran has something big in the works and is trying to move assets out of harms way. Tanker storage in the gulf would not be targeted by any opposing force because of the environmental damage. The tankers should be safe but that does not mean they can just sail away if a conflict developed. Iran may control the Straits of Hormuz but the U.S. Navy controls the rest of the ocean.

Iran's supreme leader said on Monday that Iran would deliver a "punch" that would stun world leaders on February 11th. That is the anniversary of the Islamic Revolution. Also on Monday Iran said they were going to increase enrichment of uranium to 20% and add another 10 enrichment centers. This angered world leaders and there was an immediate call for even tougher economic sanctions. Even Russia said Iran should be taught a lesson for its defiance. China is the crucial vote here and the only member of the council that passed on sanctions a couple weeks ago. You can bet the phone lines are busy tonight between the various governments as they try to swing China back into agreement for tougher sanctions. However, even without China it is likely the U.S. and the EU nations will impose sanctions of their own. It is widely known that the next target of sanctions will be gasoline imports. Iran imports 35% of its gasoline and a successful sanction there could cripple Iran and create serious internal conflict.

I would not be surprised to see crude prices sharply higher by Thursday.

Jim Brown