Iran crude floating storage hit record levels

Michelle Wiese Bockmann – LLOYD’S LIST

IRANIAN crude in floating storage has risen 28% in two weeks to a record 5.8m tonnes, or 42.5m barrels, with 21 very large crude carriers now deployed, four more than two weeks ago.

The country ramped up April crude production by 70,000 barrels per day to 3.8m bpd in April according to the International Energy Agency, but the threat of sanctions and poor sales terms has left much unsold.

Volumes were expected to build at sea until refinery demand improved or the national oil company lowered its sale price.

“Weaker demand for heavier crudes, unattractive price formulas and the threat of new sanctions have combined to reduce buying interest in the country’s heavier, sour crudes,” said the IEA’s Monthly Oil Report released today.

Iran, the world’s fifth-largest oil exporter with limited onshore storage, was estimated to have doubled crude on tankers since the end of March.

Although the country experienced similar marketing problems in 2008, mostly due to seasonal refinery maintenance for its Asian buyers, “a lack of alternative buyers has added to the armada of offshore storage”, the IEA said.

“This year the problem of unsold barrels has been compounded by the more general trend of term crude customers cutting or cancelling their contracts,” the report said.

“Term customers have turned away from Iran in part due to weaker demand for heavier, sour crudes, as well as National Iran Oil Co’s uncompetitive pricing relative to similar quality crudes. Notably, Iran is the only major supplier to Chinese buyers to have its term contract volumes cut this year. Refiners in Japan, South Korea and India have also cut or cancelled contracts with Iran for 2010.”

The IEA said it was unlikely that Iran would be able to stem the floating storage stockpiles by curtailing crude production, which averaged 3.7m bpd-3.8m bpd over the last year. The country needed to produce at higher levels to maintain gas pressure at ageing fields and meet domestic demand, the IEA said.

Furthermore, marketing woes might intensify in the near-term, the IEA forecast, because the newly appointed head of the troubled state oil company is a close ally of Iran’s president.

“Although the threat of further sanctions against the country also intensified this month, it is difficult to draw a direct line to the growing stockpile of crude inventories, which remains largely a marketing issue,” the IEA said.

“Looming sanctions, however, do help to explain the country’s shrinking list of gasoline suppliers.”

Shell, Vitol, Trafigura, Reliance, Lukoil and Glencore have all halted gasoline sales to Iran, the IEA reported, with difficulties reported for securing credit terms and insurance risks.

While Chinese suppliers, including CNPC and Sinopec trading subsidiaries Chinaoil and Unipec have filled the gap, the withdrawl traditional suppliers had created further headaches alongside the fleet of floating storage.

All 21 VLCCs and the one suezmax carrier identified by Lloyd’s List Intelligence as deployed on floating storage are owned by the National Iranian Tanker Co, and is most of the NITC fleet of 29 VLCC tankers.

They are being deployed off the coasts of Asia, the Middle East and the Red Sea, according to the data.

The floating storage volumes now exceed levels held in May 2008, when 20 VLCCs were recorded as being used for floating storage at the peak, now tying up 3.8% of the global fleet of 546.

The data showed that 46 VLCCs are now being used for floating storage, including eight in the US Gulf, as improving oil price contangos see volumes rise again.