"Inflexible" Iran Will Not Be Flooding the Market With Cheap Oil

According to Iranian officials, Iran has sold only 4 million barrels since the sanctions were lifted in January

Iran may have returned to the international oil stage, but cheap deals are not to be had for Europeans, and some former buyers are staying away due to Tehran's inflexibility regarding prices, according to reports.

The expectation of low prices have escalated ever since the Islamic Republic stated it wanted to increase production by 1 million barrels per day to restore the market share it lost due to sanctions.

Bunker buyers have been watching the situation closely, with the anticipated post-sanctions flood of cheap Iranian oil threatening to sink already low bunker prices in some of the primary ports into double-digit territory.  

But that no longer looks like it could happen, with trading sources telling Reuters that Iran won't consider offering discounts on the grounds it would supposedly result in an escalation of a price war.

According to Iranian officials, Iran has sold only 4 million barrels since the sanctions were lifted in January, including to France's Total, Spain's Cepsa, and Russia's Litasco; this is equal to five days' worth of sales at pre-2012 levels.

Former buyers such as Anglo-Dutch major Shell, Italy's Eni, Greece's Hellenic Petroleum, and trading houses  Glencore and Trafigura have yet to resume purchases, reportedly because of Iran's unwillingness to offer flexibility on prices as well as administrative factors such as the reluctance of banks to provide letters of credit to facilitate trade.

A senior oil trading executive told Reuters, "Iran is not flexible with terms: they still impose very old-fashioned destination clauses telling you where you can and cannot take your crude.

"It was okay a decade ago, but the world doesn't look like this anymore."

Another senior executive from a major European trading house stated, "We looked at options of buying Iranian oil [and] saw that shipping complications made it around $1 per barrel more expensive than rival grades.

"But when we spoke about discounts – we were told it would not happen."

One unnamed trader, in response to the theory that Iran is waiting for oil prices to increase above the current $40 per barrel mark before actually ramping up production, remarked, "You could think the Iranians have no incentive to increase their production while the prices are low.

"They lived like it for years already - they can cope with another few months."

Olivier Jakob, managing director of Petromatrix, suggests that Iran's rigid attitude stems from the possibility that "unlike Iraq, they don't have a massive surplus of oil they need to sell urgently."

He added, "When your oil is flowing fast and filling up tanks, you need to get rid of it quickly. So it remains unclear how fast Iran can ramp up output and exports after years of sanctions."

These reports come on the heels of both Iran and Saudi Arabia increasing light crude prices for February delivery to Asia by $0.60 per barrel.