European refiners have started to sever links with Iran, stopping spot purchases of crude ahead of a European Union meeting later this month that could impose a full oil embargo on Tehran.
Industry executives and oil traders said that some refiners have either stopped or reduced new purchases of Iranian oil, although they continue to receive monthly oil supplies under earlier long-term agreements, or term contracts, that they cannot break without incurring penalties.
Traditionally, refiners buy two-thirds of their oil under term contracts and the rest on the spot market, although the precise split varies from company to company. In the event of an embargo, European refiners could declare force majeure and cancel their term contracts without penalty.
“Refiners are cutting back on purchases of Iranian oil in response to new US sanctions and the anticipation of an EU embargo,” David Greely, head of oil analysis at Goldman Sachs in New York, wrote in a note to clients.
Companies are bracing themselves for an EU embargo on Iranian oil exports as western countries intensify pressure on Tehran to abandon its suspected nuclear weapons program. The US has also introduced sanctions to penalize foreign financial institutions dealing with Iran’s central bank, which clear most oil exports.
Bankers said that European banks were stepping back from financing deals with Iran as result of the new US sanctions. “By the minute, banks are getting restricted [from financing deals with Iran],” the head of commodity trade finance at a leading bank said.
The stoppage has forced Iran to start stockpiling crude at supertankers anchored in the Gulf. Gibson, a shipbroker, estimates that the amount of Iranian oil held in “floating storage” has increased from 28 million barrels at the end of November to 32.5 million barrels now. “People are generally stepping back because of the association with Iran. More and more people are voluntarily making that decision,” said Patrick Tye, senior shipping analyst at Gibson in London.
Iran is the world’s third-largest oil exporter and ships about 2.3 million barrels a day, mostly to Asia. The EU buys about 450,000 b/d on average.
Oil prices have risen above $110 a barrel since Iran threatened to shut down the Strait of Hormuz, the world’s most important oil chokepoint, accounting for about a third of all seaborne traded oil. Oil fell to a low of $99 in October amid global economic growth worries.
US Treasury secretary Tim Geithner arrived in Beijing on Wednesday as part of an oil lobbying effort that Washington hopes will add to the pressure on Tehran. Also on Wednesday, an Iranian nuclear scientist was assassinated in a car-bomb attack that Tehran blamed on Israel and the US. Among European-based oil refiners companies, Royal Dutch Shell is the biggest buyer of Iranian crude under long-term term contracts, according to estimates from Argus Media, an industry publication. Other buyers include France’s Total , Repsol YPF and Cepsa of Spain, ENI, Saras and ERG of Italy, and Hellenic of Greece.
The US stopped importing Iranian oil in October 1987 and has successfully pressed European companies, including Total and Royal Dutch Shell, to stop investing in the country’s vast energy sector.
Additional reporting Jack Farchy in London and Kathrin Hille and Jamil Anderlini in Beijing