In 22 Days, Iran Will Run Out Of Place To Store Oil It Produces. What's Next?

Tehran:

Iran is fast running out of space to store its crude as its oil exports remain choked by the US naval blockade of its ports near the Strait of Hormuz. The US blockade has prevented roughly two million barrels of Iranian oil a day from entering the world’s markets, further tightening global supply.

With its shipments collapsing amid continued output from the wells, the Islamic Republic has just enough unused storage capacity to last another 12 to 22 days, according to Kpler analysts’ latest report. 

The looming storage crunch is threatening to accelerate production cuts in what was once the second-largest source of crude under the Organisation of Petroleum Exporting Countries (OPEC). Per Kpler’s estimations, Iran may be forced to cut daily oil output by another 1.5 million barrels by mid-May.

The Islamic Republic has already curtailed about 2.5 million barrels of daily crude production after the start of the war with the US and Israel, Goldman Sachs Group Inc. said last week. Other Gulf nations, including Saudi Arabia, Iraq, Kuwait and the United Arab Emirates (UAE), have also reduced output since the conflict erupted on February 28.

Iran May Still Delay Any Deal With US

Despite the dire outlook for Iranian oil output, Iran is likely to continue its “patience diplomacy” and not rush into any hasty peace deal with the United States. 

“Negotiating with Iran requires a high dose of patience, time and hard-slog diplomacy,” Ellie Geranmayeh, senior policy fellow and deputy director of the Middle East and North Africa programme at the European Council for Foreign Relations, told Economic Times. 

“It also needs an understanding that once Tehran enters a diplomatic process, optics of respect and dignity are critical for success.”

However, according to Kpler, the regime in Tehran probably won’t begin to fully feel the financial pinch of the storage crunch for months. 

Iran has submitted a proposal to regional intermediaries offering to cease its military operations in the Strait of Hormuz, but the US response has been cold to it. US President Donald Trump has even told his aides to prepare for an extended US Naval blockade of Hormuz, the Wall Street Journal reported.

The US is, meanwhile, trying to intensify economic pressure on Iran as the war enters its third month. The Iranian crude exports have already fallen sharply since early April. Iranian shipments have most recently dropped to about 567,000 barrels a day, Kpler said. Exports averaged about 1.85 million barrels a day in March.

Still, the blockade won’t hit Iran’s profits quite as fast, with the impact to revenues not due for about three to four months, Kpler said.

Before the war, most Iranian oil exports were shipped to China, the top global crude importer. Iranian crude cargoes typically take about two months to reach some Chinese ports, often arriving via opaque channels designed to circumvent sanctions. Then buyers have a further two months to settle payments, according to Kpler.

So, the payments for the crude that was shipped before the war started are already due. Moreover, after the war started, the US had unveiled a sanctions waiver that had enabled other buyers to import Iranian oil. 

But since the US naval blockade in the region came into effect, loadings of Iranian crude onto tankers have plunged by roughly 70 per cent, the researchers noted.