Iran oil ban to put pressure on European supply lines

A European embargo on Iranian crude oil will lead to uncertainty over supply to the continent and an increase production in the Gulf, analysts say.

An Iranian oil supply shortfall would have to be made up from elsewhere. AP Photo

European embargo on Iranian crude oil will lead to uncertainty over supply to the continent, with Gulf exporters expected to increase production as an alternative source, analysts say.

But higher output from Gulf producers could be limited, and their heavy grade of crude could pose problems for Europe's refineries.

EU leaders have already agreed in principle to place an embargo on Iranian oil, and a final decision will be made at a ministerial meeting on January 23.

While some Mediterranean countries caution against the move for fear of further weakening their ailing economies, the ministers are likely to decide to act, experts believe.

That would have significant ramifications for the oil market. Europe is the second-biggest recipient of Iranian crude, importing about 18 per cent of Iran's output.

Only China received a larger share of the country's crude, which in 2010 averaged 2.58 million barrels per day (bpd), making Iran the second-biggest Opec producer behind Saudi Arabia.

The supply shortfall would have to be made up from elsewhere, a task made easier by the fact that Europe's cutting back on Iranian crude would be gradual.

Most of the deficit is expected to be supplied by Saudi Arabia, and possibly to some extent by the UAE and Kuwait, said Samuel Ciszuk, a consultant at KBC Energy Economics.

To keep Europe supplied, Saudi Arabia will have to keep production high despite increasing oil exports from a recovering Libya.

Production by the three Gulf states surged last year in response to the 1.6 million bpd lost to the international markets as Libya became embroiled in a civil war. As the economic recovery in Europe and the US started to falter, the Saudi Arabia, Kuwait and the UAE maintained their output levels even as Libyan oil was coming back to the market. Last month, Saudi Arabia said it produced 10 million bpd, a three-decade high.

Saudi Arabia has a production capacity of 12.5 million bpd, and so can single-handedly cover a shortfall equivalent to Iran's daily output in 2010, but it will not want to be too compliant.

The only country with swing capacity, or the ability to increase production significantly and quickly, it will be reluctant to produce close to its limits for fear of losing that status.

"It's going to be interesting to see what the Saudis will do in terms of production," said Mr Ciszuk.

Production in Libya is recovering well, hitting 1 million bpd before year-end, and a phased withdrawal from Iranian crude by the EU might go hand in hand with increasing Libyan exports.

Libya is important for other reasons. Similar to Iran, the crude from its reservoirs is light and "sweet", while Saudi crude is heavy and "sour". Should Saudi Arabia step into the breach and ship extra cargo to the EU, European refiners might struggle to adjust their facilities to its crude.

This could be a blow to the refinery sector, which is already suffering from tight margins and diminishing demand. Petroplus, Europe's biggest refiner, has already had its credit lines cut and is struggling for survival.

The situation is compounded by the outage of Syrian oil. While Syria is not a significant producer, its crude is also light and went to the European market.

While weak economic data will put pressure on demand in Europe, the lack of Iranian crude could keep prices high. Brent, the European benchmark, has risen this week.

In contrast, a European embargo could have the opposite effect on the Asian market. Saudi Arabia has already indicated it is not keen on losing share in the world's biggest growth market and is unlikely to scale back on supply to the region, said Mr Ciszuk.