What OPEC, the IEA Say About an Iran Embargo

Any European embargo of oil imports from Iran would have a direct effect not just on Iran, but also on the most prominent consumers of Iranian oil and refiners in the Mediterranean, according to a series of recent reports.

European governments this week said they have agreed in principle to ban imports of Iranian oil, but have yet to agree to a date. The last monthly oil report by the International Energy Agency (IEA), from mid-December, asserted that measures by the European Union and others “may not be agreed until end-January,” in order to allow for alternative sourcing by affected customers and coinciding with a seasonal fall in European refiner demand.

The report added that the embargo would involve almost 600,000 barrels per day, while a broader embargo that included sales to states in the Organization for Economic Co-operation and Development (OECD) would boost that number to 1.3 million barrels per day. Some of the most exposed EU countries include Greece, Spain and Italy [see chart].

The biggest buyer of Iranian oil, China, is “unlikely” to be affected and has already expressed opposition to what it termed “unilateral” sanctions against Iran. The US Treasury Department said in a statement that Treasury Secretary Timothy Geithner will travel to Beijing and Tokyo to discuss “continued coordination with international partners in the region to increase pressure on the Government of Iran."

The Organization of Petroleum Exporting Countries(OPEC) cites Iran as China’s second largest oil supplier, with 600,000 barrels per day. India, Japan, South Korea and Turkey also rank highly in the current buying list of Iranian oil.

Tighter sanctions, the IEA said, would stifle Iranian production capacity, forecasting a decline by 890,000 barrels per day to under 3 million barrels per day in 2016. In December,Iranian Oil Minister Rostam Qasemi told CNBC he was not worried about the possibility of an EU embargo.Iran plans to boost its oil production from the current 3.5 million barrels per day to 5.1 million barrels per day by 2015.

The IEA report also pointed out that a partial ban would “likely leave Mediterranean refiners confronting higher prices for replacement crude” from producers such as Saudi Arabia, Iraq and Russia. Whether they can fully step in to fully make up for lost Iranian Heavy crude, which constitutes the majority of EU imports, remains unclear.

European refiners, already facing negative margins in several cases, could come under more pressure if Asian buyers “secure incremental Iranian cargoes at discounted prices."

But an EU decision by the end of January to impose an embargo would, according to the IEA, “effectively begin to bite into March/April Iranian liftings."

OPEC’s December oil market report showed that Iran produced 15,000 barrels less in November than in October. At 3.55 million barrels per day, it is some 50,000 barrels less than average production in the third quarter. One official source of export numbers specifically comes from the producer-consumer energy dialogue, known as the Joint Organizations Data Initiative (JODI), but no details have been listed for Iran over the last three months. JODI depends on participating member states for data collection.

The next update for JODI and the IEA comes on January 18, while OPEC publishes its monthly oil market summary two days earlier.