Iranian oil is all at sea

VLCC crude carriers are being used to store up to 38 million barrels of oil offshore Iran.
[More Images]

Iran’s reduced ability to shift its oil is driving a massive offshore storage boom around the Gulf. Analysis and insight provided by IHS Global Insight energy analyst Sam Ciszuk

The offshore crude storage operation being managed by Iran is currently ballooning, holding between 20 and 38 million barrels of crude oil on supertankers and raising questions about its market and sanctions vulnerability as an energy exporter.

According to a number of sources, Iran’s offshore storage operation is spiralling, growing from around nine very large crude carriers (VLCCs) at the end of March to perhaps as many as 19—in addition to smaller tankers—late this week, suggesting it might be having problems in marketing its increasingly heavy and sulphuric output.

The apparently mushrooming floating storage operation is officially being blamed on the current season, full of refinery turnarounds globally, although it demonstrates Iran’s growing vulnerability as fewer and fewer refiners can process its increasingly dominant heavy and sulphuric blends, while international political pressure is being used to persuade more and more buyers to desist from trading with Iran. Still, the politics of the situation should not be overstated at this point, with clear market movements underpinning the logic of Iran’s operations. Iran is likely to wait for the refinery turnaround season to pass, yet it shows that—although the political implications should not be overstated—it is becoming increasingly vulnerable to market fluctuations, something which at some point might naturally be used against it to a certain degree.

Story continues below

Advertisement

FEATURED COMMENT Please click here to comment on this article

According to newswire reports in mid-April, Iran was keeping at least nine very large crude carriers (VLCCs) supertankers idling in the Gulf, the Gulf of Oman, and the Red Sea, in addition to a smaller number of Suezmax tankers.

Given that VLCCs normally carry around 2 million barrels of crude each and Suezmax tankers about 1 million barrels of crude, Bloomberg—on talking to traders—found it safe to assume that at least 18 million barrels of Iranian crude was being kept in floating storage, most of which vessels are owned by the National Iranian Tanker Company (NITC). The trader information was backed up by satellite imagery showing the tankers sitting deep in the water, apparently heavily laden.

Throughout April further news came in about Iran’s storage operation expanding rapidly, with additional news sources quoting trader estimates of around 19 VLCCs and one Suezmax being engaged in the operation - potentially putting Iran’s current floating storage levels at 39 million barrels - and breaking the 2008 record when, at the peak of another floating storage operation, Iran was engaging 15 VLCCs. The build-up is unlikely to have taken place over just four to five days, with one trading source telling Reuters that Iran was likely to have had 12 VLCCs engaged in storage by the end of March—higher than the number quoted by Bloomberg. Increasing investigation will be made by traders, shippers, and analysts to add up exactly how many ships are being chartered by Iran and idling in storage, with further adjustments to the numbers to be expected.

In 2008, for a period extending over several months, Iran ran a large and growing offshore storage operation, to some extent explained by normal consumption fluctuations in the refining industry, but likely to have been exacerbated by the halting of crude purchases from Iran by one of the main buyers of its most heavy and sulphuric crude at that time, India’s Reliance. Iran took some time to accommodate this change in purchasing patterns, and this led to delays in its marketing. When it finally managed to sell off the—by then quite large—floating inventory, it found itself in the somewhat problematic position of risking weakening the heavier crudes market given the volume it needed to shift. The storage operation itself racked up major costs, since a significant proportion of the supertankers were chartered from international shippers, and the scale of the operation led to freight rates rising more than 200% in less than three months.