Iran faces oil cash squeeze as US bolsters sanctions
Iran faces a fresh obstacle to turning its most lucrative export into cash as the US tightens sanctions this week to keep importers from paying for the oil with dollars and euros.
Under penalty of expulsion from the US banking system, Iranian crude customers such as China, Japan and India will be restricted to using their own currencies for the purchases starting. Importers will be compelled to keep the payments in escrow accounts that Iran can use only for locally sourced goods and services in what will amount to barter arrangements.
Mr Robin Mills head of consulting at Dubai based Manaar Energy Consulting & Project Management said that “They’ll have to accept that a lot of cash is piling up in banks in importing countries and they’ll now have to look for ways to get it out. It’s making the trade much more difficult.”
Crude production and exports from Iran plunged in the past year as the US and European Union sought to choke off money to the Islamic republic to dissuade it from pursuing a nuclear program. Today’s sanctions, part of US legislation passed last year, may exacerbate the decline because it forces bartering with countries whose exports to Iran are in almost every case less than the amount of oil they buy from it.
The International Energy Agency said that Iran exported 1.2 million barrels of crude a day in December with China, South Korea, Japan and India accounting for 84%. Sales were less than half of what Iran shipped on average during the first 10 months of 2011.
Sanctions enacted previously sought to isolate Iran’s banks and the scarcity of foreign exchange flowing into the economy has led to skyrocketing prices for consumer goods such as meat. The national currency has weakened over the last year, reaching IRR 38,900 to the US dollar in street trading yesterday compared with 16,900 in January 2012.
Mr Mahmoud Bahmani Iran’s central bank governor said recently that the new blockage on remittances will add to financial restrictions the US imposed last year that curtail Iran’s access to dollars, euros and other hard currencies. Sanctions have already forced it into barter arrangements with China, its largest oil customer.
Export Levels;
According to the IEA, shipments dipped below 1 million barrels a day in July after the EU banned purchases of Iranian crude and rebounded to as much as 1.45 million barrels a day in November as other buyers replaced the hole left by European refiners.
The IEA said in December that Iran’s exports will probably decline to about 1 million barrels a day in January and remain near that level for months. Iran itself expects to export an estimated 1.5 million barrels a day in the Iranian year starting March 21.
Mr Gholamreza Kateb spokesman for the parliamentary planning and budget committee said that Iran’s net oil export revenue dropped to USD 64 billion for the first 11 months of 2012 compared with USD 95 billion for all of 2011.
South Korea’s exports to Iran of goods such as iron and steel products and petrochemicals increased 3.2% to USD 6.3 billion last year while imports dropped 25% to USD 8.5 billion.
According to customs data, oil made up 99% of the goods that Japan and South Korea imported from Iran. India bought about USD 13.6 billion worth of products like oil, urea and anhydrous ammonia from Iran in the year through March 2012, while Iran’s purchases of Indian goods like rice, sugar and soy bean oil extracts were worth about USD 2.4 billion.
The Persian Gulf state, formerly the second biggest producer in the 12 member Organization of Petroleum Exporting Countries, has slipped to a fifth place tie with the United Arab Emirates. It pumped 2.6 million barrels of crude a day last month, the data show.
Oil Revenue;
Mr Olivier Jakob MD of consultants Petromatrix GmbH in Zug, Switzerland said that deven so, the revenue Iran can generate from its current level of exports is probably enough to sustain its economy. With Brent crude, a benchmark for more than half of the world’s oil, selling at more than USD 110 per barrel and Iranian prices at similar levels, the country doesn’t face immediate financial distress.
Mr Jakob said that “The amount of crude Iran exports at current prices is equivalent to exporting at full capacity with the price of USD 81 per barrel. As long as the oil flow isn’t stopped, Iran has time to work out the financial way around the new sanctions.”
Mr Hua Chunying spokeswoman at the Foreign Ministry said that China, the biggest buyer of Iranian crude believed that dialogue and cooperation” are the only ways to settle differences over Iran’s nuclear program. China’s trade relationship with Iran is normal and doesn’t affect any nation’s interest.
Indian Route;
India will start paying its entire bill for Iranian crude in rupees after March, when foreign currency funds at a Turkish bank are exhausted, the Press Trust of India reported, citing an unnamed oil ministry official. An Indian state run lender, UCO Bank has also been acting as an intermediary for payments.
Indian refiners using Iranian crude are in talks with the oil ministry about the planned US restrictions and will deposit their payments to Iran in rupees into an account at UCO Bank if the government makes such a request.
Source - Bloomberg