After Severely Affecting Asian Oil Refiners, US Sanctions Hit Iran

After Severely Affecting Asian Oil Refiners, US Sanctions Hit Iran 

Last updated on July 31st, 2020

Importing crude from different parts of the world has made trading increasingly tough for Asian oil refiners. As stated by industry officials, the surge in global freight rates has elevated costs of importing in the fourth quarter.

The main reason behind this is the fear of violating US sanctions against Organization of the Petroleum Exporting Countries (OPEC) members – Iran and Venezuela.

As reported by trade shipping sources, the Saudi oil attacks in mid–September have contributed to the surging prices. An addition of nearly $3 a barrel to November-lifting oil cargoes has been experienced, from the Middle East to China.

It is estimated that the oil tanker freight rates will keep on rising till COSCO Dalian’s ships remain under sanctions. The US sanctions on shipments from China on accounts of transporting crude of Iran.

The increased freight rates have affected Asia’s demand for arbitrage supplies from the US, West Africa and Europe. As stated by Sandy Fielden, a Morningstar analyst, “If freight rates stay this high – and they are unusually high because of this issue over sanctions – then U.S. crude prices have to fall, to get the Brent-WTI spread to widen to accommodate exports.”

However, sources claim that Asian oil refiners are optimistic about future with the ongoing demand to switch to cleaner fuels in 2020, keeping climate emergency in mind. The most vulnerable refiner to the increased costs is Sinopec, as 70 to 80 percent of its shipping costs are based on spot rates. As per analysts’ statements, if margins reduce further by $3 barrel for a quarter, the company’s 2020 earnings could fall by five percent.  

Even though the US-China trade talks show positive future, the slowing economy of China can be validated from the reduction in oil prices today.

Despite the four percent gain last week, Brent crude was down by 0.2 percent a barrel by 0409 GMT. On the other hand, giving its weekly best since September 20, West Texas Intermediate (WTI) crude futures were down 16 cents.

The Asia Pacific Strategist at Axi Trader, Stephen Innes reported, “There have been some small profit-taking sells on the weak China data released on Sunday and unwinding of weekend hedges.”

 According to the International Monetary Fund, the US Sanctions have badly hit Iran estimating a fiscal deficit of 4.5 percent in 2019 and 5.1 percent in 2020.

Speaking to Reuters, the Director of IMF’s Middle East and Central Asia Department, Jihad Azour said, “The estimate is that … sanctions that were reintroduced last year and tightened this year, next year will not have an additional impact.” 

A significant drop is expected in Iran’s exports of goods and services, witnessing an estimated $43 billion in 2020 in comparison to the current year.

It remains to be seen if the Asian oil refiners will be able to overcome the upcoming challenges or lose their hold in the global market. 

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