As the first month of theoretically no Iranian crude oil exports comes to a close it seems that Asian refiners have been able to cope with the loss of supplies, but it has come at the expense of their profits.
The United States didn't renew the waivers granted to eight importers of Iranian crude, which expired at the beginning of May, and the administration of President Donald Trump has been clear in saying it intends to stop all shipments from Iran.
That's where the “theoretically” part comes into play, because it's likely that the Iranians are already engaged in numerous strategies to continue to ship oil out of the sight of both the United States and the various services that track vessels.
Notwithstanding the likelihood of increasing subterfuge in Iranian oil movements, what is visible to the market shows a fairly substantial drop off in May.
Impact of sanctions
Only seven Iranian vessels have discharged cargoes at Asian ports as of May 30 and one more is scheduled to arrive on Friday, according to vessel-tracking data compiled by Refinitiv. Of these visible cargoes, six went to Iran's top customer China and two to the second-biggest buyer, India.
It's also worth noting that seven of the eight shipments departed Iran before the end of April, meaning they could still have been exempt under the US waivers.
Taking India and China together, the Refinitiv data points to combined imports from Iran of about 4,80,600 barrels per day (bpd), less than half of the 1.12 million bpd seen in April. Other buyers of Iranian crude, such as Japan and South Korea, didn't take any cargoes in May, according to Refinitiv.
For June, no Iranian oil is currently heading toward Asia's top consumers, with Refinitiv only showing one cargo en route to Indonesia and another heading to Turkey.
Obviously these shipments won't reflect the entirety of Iranian crude shipments, but they do show that the US sanctions have effectively forced Tehran to operate in the shadows of the global oil market.
Weak profitability
Turning to what has been the impact of the loss of Iranian barrels and the picture is that so far Asian customers appear to have been able to source sufficient crude from other suppliers, even if this has come at a higher price.
Total crude imports in Asia in May are expected at around 24.81 million bpd, according to Refinitiv, slightly below April’s 26.73 million bpd.
However, April's numbers were boosted by Chinese refiners stocking up on Iranian crude before the expiry of the US waivers, as well as the building of commercial inventories as new refinery units started operations.
Asia's imports in May are likely to have been higher than those in March and February, which supports the view that refiners are able to access sufficient crude.
However, higher prices are hurting profits, with refinery margins dropping to the lowest for this time of year in 16 years. The profit per barrel of Dubai crude processed in a Singapore refinery was at $2.87 on Friday, well below the $4.21 from a month ago and the moving 365-day average of $4.42.
Prices to increase
The weak profitability is unlikely to be helped by industry expectations that Saudi Arabia, the world's biggest crude exporter and the country most able to compensate for the loss of Iranian cargoes, will increase its official selling prices in July.
Saudi Arabia is expected to increase prices for all grades it sells to Asian refiners for a third straight month, reflecting the strength of demand for heavier crudes given the loss of Iranian barrels and output restrictions by OPEC and allied producers, including Russia.
A further negative for Asian refiners is rising product exports from China, which has boosted refinery capacity faster than domestic demand has been growing. China's diesel exports in April surged 43 per cent from a year earlier, customs data showed on May 23, reaching about 650,000 bpd, while jet fuel exports rose 31 per cent from a year earlier to about 3,04,000 bpd.
China also increased the quotas available to refineries, raising the possibility that the high pace of exports will extend in the coming months. Overall, refiners in Asia are being squeezed on two fronts, from the higher costs of crude due to Iranian exports being curtailed, and from higher product shipments from China.