Posted on 12/21/2011 1:48:46 PM PST by PGR88
China has made an audacious move to force Iran to sell it cheaper crude, disrupting the flow of more than 10 per cent of its exports by cutting January imports in half.
In contrast to other top Asian buyers worried about what sanctions mean for crude flows from the world's fifth-largest exporter, China has shown no public qualms about the risk that a disruption will drive up the cost of oil.
The world's second-largest crude importer has chosen its moment for hard bargaining. Iran is facing the threat of fresh sanctions from the US and European Union over its nuclear programme that could prevent Asian refiners from paying for Iran's oil, and European refiners from buying it.
With fewer buyers, Iran will face a stark choice: either sell more to top buyer China or cut the exports that provide Tehran's economic lifeline.
China knows it is Iran's buyer of last resort. So when Iranian negotiators refused to budge on their demand for tougher terms on 2012 oil sales, refiner Sinopec (SEHK: 0386) responded by cutting its January purchases by about 285,000 barrels a day.
That is over half of the near 550,000 bpd that China has been buying this year and over 10 per cent of Iran's 2.4 million bpd of exports.
"Now is a good time for the Chinese to bargain," said Liu Tong Zhang, Singapore-based analyst at consultancy FACTS Global Energy. "It's all about price. We should see this resolved in a matter of months."
A long-term disruption in the volume of supplies China buys would strengthen the impact on Iran of new US and EU sanctions.
But China has previously criticised unilateral sanctions imposed outside of the UN framework, and is simply looking for a better deal rather than changing diplomatic tack, analysts and industry sources say.
Other industry sources said the dispute was likely to be short lived, as Iran would back down if it feared it would lose market share in China.
Tehran depends on crude for about half of government revenue and can ill afford such a big hit. The value of the crude Sinopec has cut is worth nearly US$900 million at a price of around US$100 a barrel.
China has driven global oil demand growth for a decade and Iran is competing with regional rival Saudi Arabia for the market. China bought 547,000 bpd from Iran to October, up from 426,000 bpd for all of 2010. Only Saudi Arabia and Angola sell more to China.
Tokyo, Seoul and New Delhi are working diplomatic channels to prevent the planned US sanctions against Tehran from impacting oil shipments, as they worry about driving up global fuel costs and straining fragile economies.
"I conveyed my view that there is a danger of causing damage to the entire global economy if the imports of Iranian crude oil stop," Japan's Foreign Minister Koichiro Gemba said on Monday after talks with US Secretary of State Hillary Rodham Clinton. In contrast China, the world's second-largest importer after the US, has shown no public qualms about potentially driving up the costs for the crude on which it depends.
Rising supply from Opec may have mitigated Beijing's concern. Saudi Arabia last month boosted output to its highest in decades.
Libya is also increasing output rapidly as it recovers from its turmoil. Sinopec's oil trading arm Unipec has bought about two million barrels of Libyan crude for December or January lifting.
Iraq has been steadily ramping up output to 2.95 million bpd, and Chinese traders see the country's imports from Iraq up by half in 2012 to 500,000 bpd.
Unipec has already bought much of the oil it will need to substitute the Iranian barrels in January.
"Unipec has bought a lot of Russian Urals and Iraqi Basra Light cargoes for January loading or January arrival, enough to offset its loss of Iranian oil", said one trader at a Western trading house.
Aside from supplying China's refineries, Unipec also trades on its own account. Its global portfolio of a million bpd gives it scope to replace Iranian barrels in deliveries to Chinese refineries, although it would need to use alternatives to meet contracts with international customers.
Yet another reason why I think Canadian Oils will be a good investment. Forbes (where I first read about them) is worth the subscription price.
China would need to test it’s ability to quickly diversify out of Iranian oil in response to an Iran being bombed and invaded by Israel and the US.
We all know Obama isn’t going into Iran. Imagine a new Republican President being told that Iran is preparing for a nuclear strike on Israel... China see’s this as a very real possibility.
China will soon be getting the oil we would have gotten from Canada if dipstick had approved the pipeline.
As much as the Chinese tick me off, sometimes you gotta love them. Glad they stomped the neck of the Iranians on this one.
China has made an audacious move to force Iran to sell it cheaper crude, disrupting the flow of more than 10 per cent of its exports by cutting January imports in half.
Saudi Arabia last month boosted output to its highest in decades. Libya is also increasing output rapidly as it recovers from its turmoil.
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