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Buyers now have more options for crude oil purchases, leading to a shift in the energy landscape

Rashid Husain SyedFor energy markets, it was not a good omen.

The war in the Middle East is expanding. Since November 19, Houthi militia has launched drone and missile attacks at more than 20 ships passing through the Red Sea ‘in solidarity with Palestinians in Gaza.’

Houthis claim they were targeting vessels with Israeli links or were sailing to Israel. The attacks have led major shipping lines to avoid the Red Sea and instead circumnavigate Africa via the alternative, safer, but longer and costlier route.

Meanwhile, the recent Israeli attack in Lebanon and the bomb blast in Iran all point to the possibility of an expansion of the war theatre in the Middle East. All this means that the war premium on oil could go up.

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In the meantime, interesting developments involving two major ‘sanctioned hit’ oil producers, Iran and Russia, could also impact the global oil markets more broadly.

However, recent developments have posed obstacles to this arrangement. Iran, in particular, is reportedly pursuing higher prices for its crude, which it supplies to its primary customer, China. Reuters reported on Friday that Iran has been withholding supplies and now seeks narrower discounts for its December and January deals, previously agreed upon in November 2023. Initially, Iran had offered its Chinese customers a discount of approximately US$10 per barrel compared to Brent prices. Nevertheless, reports now suggest that Iran aims to limit these discounts to a range of US$5 to US$6 per barrel for its light crude relative to Dated Brent, according to trading sources cited by Reuters.

China had been estimated to save US$10 billion on crude oil imports between January and September 2023 by importing record volumes of more affordable oil from Russia, Iran, and Venezuela – three countries all under U.S. and Western sanctions, as per a Reuters analysis conducted last year.

According to Reuters, the mid-October relaxation of U.S. sanctions on Venezuela has bolstered Iran’s position in price negotiations with its Chinese customers. Following the U.S. waiver, Venezuela redirected its crude intended for China and other destinations to the U.S. and India. This shift has allowed Iran to adopt a firmer stance on pricing in its dealings with China.

China’s imports of Iranian oil dropped to approximately 1.18 million barrels per day (bpd) last month, down from 1.22 million bpd in November and a significant 23 percent decrease from October’s record 1.53 million bpd, according to estimates by tanker tracker Vortexa Analytics.

This accounts for a substantial portion of Iran’s global seaborne crude exports, estimated at 1.23 million bpd for December by another tracker, Kpler, down from 1.52 million bpd in November. Kpler also reported that floating storage off Iran and nearby waters increased by approximately two million barrels to 15.5 million barrels over the past week.

Although India’s overall crude imports, approximately 1.5 million bpd, are significantly lower than China’s requirements, the increased availability of Venezuelan and Iranian crude in the market has allowed New Delhi to negotiate more favourable terms with Moscow, its major supplier. Amid the Biden administration’s intensified pressure on Russia, India is now pushing for better pricing from its primary supplier.

Indian Oil Minister Hardeep Singh Puri clarified that the decline in India’s oil imports from Russia was primarily due to unattractive pricing rather than payment issues. Imports of Russian oil by India in December dropped to an 11-month low, with five ships loaded with the light sweet Sokol grade being redirected to other destinations.

Puri emphasized, “If they (Russia) don’t offer us (good) discount, why would we buy from them?” as reported by Reuters. He further noted that new oil producers in distant regions were willing to provide more attractive discounts on crude sales than Russia. Bloomberg had also reported earlier that stricter enforcement of G7 sanctions and associated payment problems had delayed Indian purchases of some cargoes of Russian crude oil, with tankers that were originally bound for India now changing course eastwards.

With buyers having various options for crude purchases, the energy landscape has indeed shifted into a buyer’s market.

Toronto-based Rashid Husain Syed is a highly-regarded analyst specializing in energy and politics, with a particular emphasis on the Middle East. Besides his contributions to both local and international newspapers, Rashid frequently lends his expertise as a speaker at global conferences. His insights on global energy matters have been sought after by organizations such as the Department of Energy in Washington and the International Energy Agency in Paris.

For interview requests, click here.

The opinions expressed by our columnists and contributors are theirs alone and do not inherently or expressly reflect the views of our publication.

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