Crude Shakes Off Gains; India Cancels Iran Shipments

The $125 billion bailout of Spain’s banks put some life in US stocks this morning, and boosted Brent crude prices to more than $102/barrel before tumbling back to below $98/barrel in the late morning. This is, perhaps, a sign that that most investors and crude oil traders have caught on to the fact that the Eurozone continues to avoid making a lasting decision regarding its weak economies.

There was another wrinkle thrown into the crude market this morning as well, detailed in an exclusive report at Reuters. India, which signed a contract for 310,000 barrels/day of crude from Iran in April, will cancel 173,000 barrels/day in July because the privately held Indian refiners cannot get insurance coverage on the cargoes. India’s state-run refiners have been able to get insurance through the government, which private refiners are now also requesting. India is the fourth largest importer of oil in the world, and the second-largest Iranian customer.

The flow of crude out of Iran has been cut by 600,000 barrels/day from the 2.2 million barrels/day exported in 2011. The government of India has taken some shipments of oil from Iran and paid in rupees, which Iran can then spend only in India. The same is true of some shipments to China, which have been paid for in yuan, another currency that cannot be spent outside its home country.

India is angling for a waiver from US sanctions against Iran and the country has cut its Iranian imports by 11% from last year’s levels. If the waiver is granted, the government might be willing to insure at least some portion Iranian exports to India.

The falling price of crude is largely the result of falling demand, which is a result of the slowdown in the global economy. Thus, the lack of Iran’s crude on the international market should have little impact on Brent prices.

Until the world’s economy starts to grow at a faster pace, crude oil prices are going to be feeling some serious downward pressure until the per-barrel price falls below production costs. Then shutting in some production will follow, but probably not a lot because shutting in a well is much more complicated than simply turning off a faucet. We could be looking at low crude prices through the summer and on into next year. Unfortunately, it’s the result of a weak economy and not due to any positive change in the world’s demand for oil.

Paul Ausick