After South Korea became the first of Iran’s major oil customers to reduce imports to zero under American pressure, the nation’s biggest refiner is seeking alternative supplies to fill the gap.  And U.S. crude is on the list.  SK Innovation Co. is increasing purchases from America to make up for the drop in Iranian oil shipments before U.S. sanctions come into effect, according to a company spokesperson. Russia and Australia are other options, with the refiner already buying condensate, an ultra-light crude oil variety, from Russian producers, said the official, who asked not to be named because of internal policy.  With U.S. pressure set to be more intense than during the Obama administration, the world’s oil buyers are having to look elsewhere to replace supplies from the Persian Gulf nation. Purchasing more from the U.S. may also help bilateral relations after President Donald Trump last year berated the Asian nation for a trade deficit, prompting the South Korean government to look to energy imports to fill the gap.  The tightening Asian market due to the Iranian sanctions offers opportunity for U.S. condensate producers to boost exports to the region, Morningstar said last week. Condensate is especially popular with South Korea’s refiners, who have also been buying the oil from countries including Australia, Norway and Saudi Arabia.  SK Innovation bought 3.08 million barrels of crude from the U.S. for July arrival, up from 1.04 million in March and 2.08 million barrels in April, a month before Trump said he would reimpose sanctions on Iran. It completely halted Iranian condensate shipments for August arrival.

Iraq Seeing Extra Requests From Customers to Replace Iranian Oil

Customers want to satisfy their needs with spot cargoes if they are available in addition to contractual quantities, Ali Nazar Faeq al-Shatari, Iraq’s national representative to OPEC, tells reporters in Singapore on Wednesday.

• The requirement is not permanent
• Iraq has received requests for additional oil that’s in excess of its capacity since 2016

• Disruption in Iranian exports is new factor to supply their refineries with alternative crude
• “Iran factor is added on the prompt demand”
• Iraq’s state oil company SOMO is looking at acquiring storage tanks in Asia and is open to discussions on more profit-sharing agreements as it seeks to expand its foothold in the region

UAE’s ADNOC to export new crude oil grade in Nov – sources – Reuters News

India Is Said to Cut Imports of Iranian Oil to Zero in November

India is not planning to buy any crude oil from Iran in November, raising the prospect that Tehran will lose another major customer as U.S. sanctions hit.  Indian Oil Corp. and Bharat Petroleum Corp. haven’t asked for any Iranian cargoes for loading in November, according to officials at the companies. Nayara Energy also doesn’t plan any purchases, said an industry executive. Mangalore Refinery and Petrochemicals Ltd. hasn’t made any nominations for that month, but may do so later, a company official said.  Final decisions on purchases aren’t due until early October, so the refiners could still change their minds. The company officials and industry executive asked not to be named citing internal policies.  The rapid drop in Iranian exports has helped to push Brent crude, the global benchmark, to a four-year high above $80 a barrel. Further output losses could push prices even higher as refiners urgently seek replacement barrels elsewhere. Around the world, only Saudi Arabia and, to a lesser extent, United Arab Emirates and Russia, have the capacity to pump more.  Brent hit an intraday high of $82.55 a barrel on Tuesday, up 23 percent this year, just after U.S. President Donald Trump railed against OPEC and demanded the cartel lower oil prices.

Major Buyer

India is the second-largest buyer of Iranian oil, having imported an average of 577,000 barrels a day this year, or about 27 percent of the Middle Eastern country’s exports, according to Bloomberg tanker tracking data. With South Korea, Japan and European nations also cutting imports to zero, the loss of the Indian refiners, even if temporarily, is a major blow for the Islamic republic.  At the same time, the U.S. sanctions that are due to go into effect in early November are creating a major gap in the global oil market just as Brent crude hits a four-year high above $80 a barrel. Mercuria Energy Group Ltd. and Trafigura Group, among the world’s biggest trading houses, are predicting the loss of Iran’s supply will boost prices to $100 a barrel for the first time since 2014.  That risk has been echoed by some of the world’s biggest oil companies. BP Plc Chief Executive Officer Bob Dudley sees the sanctions on the OPEC nation having a bigger impact on the market this time than the previous round of restrictions six years ago.

Harder Stance

U.S. President Donald Trump’s administration is taking a harder stance. It wants all oil imports from Iran to end by November, and it’s unclear if any waivers will be granted. In previous sanctions under Barack Obama, the government had allowed nations to continue purchases at reduced levels.  The tougher attitude is already showing in Iranian barrels vanishing from the market. South Korea became the first of Iran’s top-three oil customers to heed the U.S. diktat by refraining from any purchases last month. Japanese refiners have also temporarily halted loadings.  India and China had held out hope for Iran. It was only about four months ago that India’s foreign minister said that the country won’t adhere to unilateral restrictions and will continue buying Iranian crude. China also made similar comments and was said to have rejected an American request to cut imports.  When Trump in May announced plans to reimpose sanctions on Iran’s oil exports, the market estimated a cut of about 300,000 to 700,000 barrels a day, Trafigura’s co-head of oil trading Ben Luckock said this week. However, the consensus has now moved to as much as 1.5 million barrels as the U.S. is “incredibly serious” about its measures, he said.

Saudis Shift Own Oil Diet to Supply Buyers Who Are Shunning Iran

As impending U.S. sanctions squeeze Iranian oil supplies, top OPEC member Saudi Arabia is changing its own crude diet to meet customer demand for alternative cargoes.  The trading arm of state-run producer Saudi Aramco is said to be offering an ultra-light oil known as Khuff condensate, a rarely traded grade that’s typically processed in the nation’s domestic refineries. To free up this more valuable supply for export, the Middle East country is diverting its Extra Light crude to units that split it into raw materials for petrochemicals and fuels.  Saudi Khuff supplies are entering the market at a time of growing demand for condensate, as operators of purpose-built splitters in countries such as South Korea and Japan scramble for alternative feedstock following a halt in purchases of Iran’s South Pars variety. The countries have turned to cargoes from Norway and the U.S., as well as the oil-product known as naphtha, to make up for the shortfall.  Spot supplies of Khuff are valued at about $2 a barrel over the official selling price for Arab Extra Light crude for the month of October, according to a Bloomberg survey of three traders who participate in the market. Unlike crude exports from the kingdom, condensates can be traded in the spot market and come without destination restrictions.  While Aramco sells most of its output via long-term contracts, its trading unit is increasingly leveraging the parent’s global network in procurement and refining. It’s dealing in non-Saudi crude, and made a sale of U.S. Mars oil to Taiwan’s Formosa Petrochemical Corp. in July this year. It’s also leaning on domestic refining operations to absorb restricted barrels in order to cash in on demand for more valuable and freely traded grades.  Its strategy is playing out just as the Organization of Petroleum Exporting Countries rebuffs demands from U.S. President Donald Trump that it take action to reduce prices. The group and its allies signaled less urgency and stopped short of promising specific extra volumes of crude, saying output would be boosted only if customers requested it.

Saudi Aramco signs crude oil supply term deal with China’s Rongsheng – source – Reuters News

Saudi Aramco has signed a long-term deal with Zhejiang Rongsheng to supply crude oil to the Chinese company’s new refinery in eastern China, a source with knowledge of the matter said on Wednesday.  The volume and grades to be supplied were not available. Saudi Aramco and Rongsheng could not be immediately reached for comment.  Rongsheng International Trading Co, the trading arm of Chinese conglomerate Zhejiang Rongsheng Holding Group, has already bought spot Omani crude ahead of the new refinery’s start-up.  Zhejiang Petrochemical, 51 percent owned by textile giant Rongsheng Holding Group, was in August awarded a quota to import 5 million tonnes of crude oil this year. The company plans to start up its 400,000-barrels-per-day refinery-petrochemical project in eastern China in late 2018.

Iran oil exports fall before US sanctions -global banking group – Reuters News

Iranian oil exports are declining ahead of a second round of U.S. sanctions to be imposed on Nov. 4 and Iran’s economy is likely to contract 3 percent this year and 4 percent in 2019, the Institute of International Finance said on Tuesday.  Exports of crude oil and condensates have declined by 0.8 million barrels a day (mbd) from April to September 2018, the IIF, which represents major banks and financial institutions from around the world, said.  It said crude oil and condensates exports were 2.8 mbd in April and are now estimated at 2.0 mbd in September.  The IIF said in an updated note on Iran’s economy that oil exports are falling even although Iran is selling key grades at a deep discount and using its own tankers to ship products to China and India at no extra cost.  The IIF said Iranian shippers were also providing generous payment terms and, in some cases, accepting euros and Chinese yuan instead of U.S. dollars. The IIF said barter trade and cash could play a bigger role as U.S. sanctions are enforced.  The updated report comes as U.S. President Donald Trump and Iranian President Hassan Rouhani exchanged taunts at the United Nations General Assembly on Tuesday.  The remaining parties to the 2015 Iran nuclear deal, which curbed Iran’s nuclear program in exchange for sanctions relief and from which Trump withdrew the United States in May, agreed on Monday to work to maintain trade with Tehran despite skepticism this is possible as U.S. sanctions to choke off Iranian oil sales resume in November.  In a statement after a meeting of Britain, China, France, Germany, Russia and Iran, the group said they were determined to develop payment mechanisms to continue trade with Iran despite skepticism by many diplomats that this will be possible.  The European Union’s plans for a "special purpose vehicle" (SPV) designed to circumvent U.S. sanctions against Iran’s oil exports is deeply counterproductive, U.S. Secretary of State Mike Pompeo said on Tuesday.  Several European diplomats said the SPV idea was to create a barter system, similar to one used by the Soviet Union during the Cold War, to exchange Iranian oil for European goods without money changing hands.  The IIF said such a system would likely fail to persuade major European companies to do business with Iran for fear of U.S. sanctions.  "Iran may continue to be committed to the 2015 nuclear deal providing the EU and others do the same," the IIF said. "However, failure to renegotiate the deal with the U.S. would likely bring about even deeper damage to Iran’s economy," it added.

Iraq plans measured oil output and export rise: SOMO – Platts

Iraq expects to increase its output and exports in a gradual manner and has no intention of affecting market price and balance or taking another supplier’s market share, Ali Nazar Faeq Al-Shatari, Deputy Director General of State Oil Marketing, told S&P Global Platts in an interview.  "For the end of this year, our plan is not that different from what figures show right now," Shatari, who is Iraq’s national representative for OPEC, said Monday on the sidelines of the Asia Pacific Petroleum Conference in Singapore.  Iraq’s oil exports from the south could show a slight increase in September from August, he said, but added that the increase is within what the market needs.  "It would not be a sudden increase that may affect the market price and the market balance," he said.  By the end of this year, Shatari said: "So in this case it will be around 3.6 million b/d for exports…The production capacity may reach to over 4 million b/d."  Iraq boosted its crude exports from the south to a new record high of 3.583 million b/d in August, up 40,000 b/d from July as the producer group followed up on its agreement to release more barrels to the market.

MARKET SHARE

Asked whether Iraq faces incremental demand for oil today because of looming US sanctions against Iran, Shatari said: "No we have had incremental demand since two years ago, and it’s the same demand. We have not been able to satisfy it because of limited export capacity."  "We are not going to increase the production in order to take the market share of any other player. But it is based on market needs," he said.  South Korea for one imported 36.21 million barrels of crude oil from Iraq in the second quarter, higher than 30.92 million imported in Q1 and 31.85 million received in Q4 last year, the latest data from state-run Korea National Oil Corp. showed.  Reflecting Asia’s growing interest in Iraqi barrels, the spread between second-month Basrah Light crude and second-line Platts Dubai swap rallied to $1.18/b earlier this month on September 11, the highest premium since Platts first launched the daily cash assessment of the flagship Iraqi export grade in November last year.

ASIAN SHARE

Asia’s share in Iraq’s oil exports has risen to as high as 73% in recent months, up from about 28% in 2006, as the country has stepped up efforts to penetrate the market by satisfying customers’ needs, "It’s reaching high limits. It started from 28% in 2006, now it’s around 63% on average and in some months it even reached 73% of Iraqi crude oil going to Asia, [with] the rest going to Europe and the US," Shatari said.  The Asian market is Iraq’s priority. "The strategy is to increase market share by satisfying the needs of customers, and our customers are mainly end-users who have refining systems of their own." A strategy that has helped Iraq boost market share is that it is not fussy about the size of the customer and offers reliable supply.  "We are always searching and opening our doors to new customers even if they have limited refining capacity. We also don’t discriminate and apply the same terms and conditions to all our customers," he said, adding that Iraq also offers a lot of certainty to its buyers.  Another strategy is to take stakes in assets in countries such as China, India and South Korea. But this is still being studied, he said. For example, Iraq was still studying the possibility of acquiring storage capacity in East Asia through holding talks with Chinese, South Korean and Japanese companies.

BASRAH MEDIUM CRUDE

Iraq is planning to add a new grade, Basrah Medium, to add more variety and supply its customers, he said.  "Currently we have Basrah Light and Basrah Heavy, but Iraq has production of light crude oil in Basrah and some fields with an API of 34 to more than 40 API," he said.  There are enough Basrah Medium supplies for export, but exports will only start once the logistics are ready, he said.  Once Basrah Medium is launched, it will replace Basrah Light, said Shatari, adding that the big bunch of crude oil will be Basrah Medium, and Basrah Heavy crude will remain as it is.

Iraq’s crude oil offerings will comprised of Basrah Light with an API gravity of 34-40, Basrah Medium with 29-30 API and Basrah Heavy with 23-24 API.  Asked to comment whether SOMO is reviewing its benchmark pricing for crude oil sales to Asia Shatari said: "SOMO keeps an eye and evaluates and assesses the market benchmark if it is from Platts, DME, Argus…Whatever benchmarks are available in the market."  "Always we keep an eye and assessing it in very efficient ways. We are not in a hurry to apply any changes."

Brent Oil to Stabilize in $70-$80/Bbl Into Year-End: Goldman

Global marker Brent crude prices to stabilize in $70-$80/bbl range into the end of year as “another supply catalyst beyond Iran would likely be needed for prices to meaningfully break to the upside,” Goldman Sachs’ analysts including Damien Courvalin say in note Tuesday.

Price rally to November 2014 highs due to Iran exports declining faster than expected, OPEC not delivering commitment to strongly increase output, while global growth expectations are stabilizing and China restocking occurring

Iranian oil loadings showing 0.65m b/d decline since April across destinations, with negligible exports to Europe, Japan and Korea; shipments to India and China also down

Some Iranian production likely being exported through Iraq, with Basra loadings up 0.3m b/d over same period

Expects OPEC to offset such losses

OPEC guidance implies incremental 0.5m b/d production growth; Goldman believe there remains sufficient spare capacity to deliver this growth and offset further declines in Iranian output to expected cumulative loss of 1.4m b/d

Lack of new production growth guidance by OPEC “does not reflect a desire to let prices appreciate meaningfully further, but rather the historical pattern of OPEC responding to rather than front-running production losses”

While Iran exports have fallen quickly, path forward remains uncertain due to factors such as U.S-China trade war; China could increase imports from Iran

A large price increase from current levels will likely lead to an SPR release by the U.S. ahead of midterm elections

Goldman still says being long oil “offers a compelling returns opportunity, mostly from the 10% annual carry created by the current level of backwardation”

In Fight for Survival, China’s Dimming Oil Stars Pledge to Unite

A clutch of oil buyers in the world’s top market are facing an existential crisis, forcing them to band together or face the prospect of perishing.  Independent refiners in the eastern Chinese province of Shandong plan to join forces to create three or four mega-projects over the next five years, according to Zhang Liucheng, who heads an alliance of the processors. With a proposed investment of 100 billion yuan ($15 billion), the consolidated plants will have capacity of 20 million tons a year each, and will focus on making more lucrative products like petrochemicals, he said.  The refiners — known as teapots — burst onto the global oil market only a couple of years ago, and helped lift China past the U.S. as the world’s largest crude buyer. Now, they’re struggling in the face of competition from giant state-backed rivals, stricter tax rules, reduced access to funding and a campaign to cut overcapacity supported by President Xi Jinping. Profits have shrunk, and at least one has gone bust this year.  “The supply-side reform in our industry might happen in second-half 2019,” Zhang, General Manager of Shandong Petrochemical & Energy Group, said in reference to the proposed government-backed policy to curb overcapacity. “Some smaller players face the risk of closures,” he said during the annual Asia Pacific Petroleum Conference (APPEC) in Singapore this week.

Shrinking Spotlight

At the previous APPEC, Zhang had announced that his company will team up with an equity fund that’s part of the provincial government of the Shandong province and a few other companies to form a $5 billion alliance. The venture even planned to gather more capital. A year on, the industry is being racked with uncertainty about its future.  A deleveraging movement by China’s central government has reduced funding to teapots and raised financing costs. Financial risks remain Zhang’s biggest concern over the industry, with operating costs rising due to factors including a near 40 percent rally in crude prices in the past year and the closure of a tax loophole that has led to higher levies.  Most of the teapots rely on state-run oil firms to sell to after the central government stopped allowing them to export fuel. Now they are likely to also be hit by a giant refinery run by Hengli Group that will begin supplying large volumes to state-backed companies such as PetroChina Co. and Sinopec from next year, Zhang said. That could reduce procurement from Shandong teapots significantly, he said.

High Hopes

Zhang has high hopes that consolidation will stem the decline of their business. The private processors will move away from their current mainstay of making oil products such as gasoline and diesel, shifting more than 40 percent of their revenue make-up to chemicals including aromatics and olefins, he said.  The teapots that mainly produce oil products have a margin of about 5,600 yuan per ton, compared to an estimated margin of 7,500 yuan per ton for refineries that focus on petrochemicals, Zhang said. Switching will help Shandong teapots catch up with new refineries in China, he added.  The teapots, of which there are now about 40, developed largely without the support of the government in a country dominated by state-backed enterprises. They grew from village-level businesses in the 1990s to become rising stars of China’s burgeoning energy industry. For Zhang, who likens the difficult conditions now to when the teapots first started, the threat facing the industry is merely a harsh season waiting to pass.  “Our strength is that we are survivors,” Zhang said. “We are children of winter, why would we be afraid of the harsh cold?”

U.S. Cash Crude-Grades firm on final day of rebalancing – Reuters News

U.S. crude differentials strengthened on Tuesday as traders rebalanced positions and as U.S. crude’s discount to Brent widened to the most in a week.  Traders rebalanced positions on the final day of cash roll trading, after the October futures contract expired last week. The October/November roll traded between +$0.30 and +$1. The three-day cash roll window ends Tuesday.  U.S. crude’s discount to Brent widened by 47 cents to $9.59 per barrel, the widest level in over a week.  Export demand for coastal grades typically rises when U.S. crude trades at a bigger discount compared with Brent.  Light Louisiana Sweet firmed to trade at a $8.50 per barrel premium to U.S. crude futures, the strongest level in three months. West Texas Intermediate at East Houston, strengthened by about $1.50 to trade at a midpoint of about a $7.75 per barrel premium to futures.  Inland grades also strengthened. West Texas Intermediate at Midland rose to as little as a $8 per barrel discount to U.S. crude, the strongest in about three months. Signs of a slowdown in production growth has supported prices and helped ease bottlenecks that sent prices to four-year lows, traders said.  Meanwhile, crude inventories rose by 2.9 million barrels in the week to Sept. 21 to 400 million, industry group the American Petroleum Institute said, compared with analysts’ expectations for a decrease of 1.3 million barrels.  Crude stocks at the Cushing, Oklahoma, delivery hub rose by 260,000 barrels, API said.

•Light Louisiana Sweet WTC-LLS for October delivery jumped $2.20 to a midpoint of $8.5 and traded between an $8 and $9 a barrel premium to U.S. crude futures.

•Mars Sour WTC-MRS rose 75 cents and was seen bid and offered between a $4.50 and $5 a barrel premium to U.S. crude futures.

•WTI Midland WTC-WTM rose $1.50 to a midpoint of $9 a barrel discount and traded between a $10 and $8 a barrel discount to U.S. crude futures.

•West Texas Sour WTC-WTS rose $1.50 and was seen bid and offered between a $10 and $9 a barrel discount to U.S. crude futures.

•WTI at East Houston, also known as MEH, WTC-MEH traded at $7.80, $8 and $8.50 a barrel over WTI.

U.S. Cash Products-Gulf Coast gasoline rises as trade for product rolls to November – Reuters News

U.S. Gulf Coast gasoline cash differentials rose on Tuesday as the product rolled to trade against the November futures contract on the New York Mercantile Exchange, market participants said.  M3 conventional gasoline gained 1.50 cents a gallon to trade at 3.25 cents per gallon above the gasoline futures benchmark, traders said. Trade for the product moved to Colonial Pipeline’s 55th cycle for delivery to New York Harbor.  A3 CBOB gasoline rose 1.25 cents a gallon to trade at 0.5 cent per gallon below futures.  In the Midwest, Chicago CBOB gasoline lost 1.75 cents a gallon to trade at 11.00 cents per gallon above the futures contract, market participants said. Trade began on the first cycle of October delivery into the Buckeye complex.  Chicago ultra-low sulfur diesel rose a half penny to trade at 1.75 cents per gallon below the heating oil futures benchmark.   In New York Harbor, M2 conventional gasoline rose a quarter of a penny to trade at 7.00 cents per gallon above the futures contract, traders said.  U.S. gasoline stocks rose by 949,000 barrels, industry group the American Petroleum Institute said on Tuesday, compared with analysts’ expectations in a Reuters poll for a 788,000-barrel gain.  Distillate fuels stockpiles fell by 944,000 barrels, compared with expectations for a 752,000-barrel gain, the API data showed.  Refinery crude runs fell by 687,000 barrels per day, API data showed.  The RBOB futures contract on NYMEX rose 1.3 cents to settle at $2.0677 cents a gallon on Tuesday. NYMEX ultra-low sulfur diesel futures gained 1.94 cents to settle at $2.3053 a gallon.  Renewable fuel (D6) credits for 2018 hit fresh lows of 11 cents each on Tuesday, dropping from 14 cents each on Monday, traders said.  Biomass-based (D4) credits fetched 33 cents each, down 35 cents each on Monday, traders said.

U.S. oil refiners’ weekly capacity seen down 538,000 bpd -IIR – Reuters News

U.S. oil refiners are estimated to have 1,570,000 barrels per day (bpd) of capacity offline in the week ending Sept. 28, reducing available refining capacity by 538,000 bpd from the previous week, data from research company IIR Energy showed on Wednesday.  IIR expects offline capacity to fall to 1,529,000 bpd in the week to Oct. 5.  The following are IIR weekly figures for offline capacity (in thousands of bpd):

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