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Lower prices for Iran’s oil mean better margins for refiners, competition for Russia

Refineries across Europe are anticipating the return of Iranian crude oil to their operations, and the potentially higher margins as added crude pushes prices down further. Approximately 27.5% of Iran’s crude exports were to Europe in 2011, and refiners are excited to see the crude return, according to a report from Reuters.Iran

“Iran has been a long standing valued partner … We are looking forward to Iran coming back to the market,” said a spokesman for Greece’s biggest refiner Hellenic Petroleum (ticker: ELPE). “The volumes of crude oil that will re-enter the Mediterranean market will ease prices and give more options for refiners in the region,” he added.

A spokeswoman for Spain’s Compania Espanola de Petroleos (CEPSA) said “Iranian crude has largely been part of our supply and we maintained a long commercial relationship with them.” CEPSA also in a statement that, “If sanctions are lifted, as it seems, Iranian crudes will definitively be again another alternative to consider.”

Iran adds to the global glut

Opinions on how much crude Iran might add to the market, and when, vary greatly, but any additional crude oil added to the global market will most certainly put downward pressure on commodity prices. Estimates range between just 600 MBOPD by the end of 2017, all the way to 800 MBOPD within the next 6-12 months.

E&P companies are less than thrilled by the prospect of additional crude from Iran pushing prices even further down after a meteoric drop in prices following OPEC’s November decision to continue producing at the same rate, but refiners may stand to benefit from the added Iranian production. Lower prices for refiners mean larger crack spreads and greater profits.

In the European gasoline market, the Northwest Europe gasoline-Brent crack spread averaged $0.35/gallon in April, the highest since at least April 2010, according to the Energy Information Administration (EIA). The high crack prices were also seen in Asia, where the April crack-spread was $0.39/gal, and in the U.S., where the spread was $0.38/gal.

Refiners

Iranian production could mean trouble for Russia

Much of the production that European refineries used to purchase from Iran was picked up by Russia following the implementation of sanctions. “Iran is going to be competing in Europe head-on with Russia,” Ed Morse, head of commodities research at Citigroup, told Bloomberg.

Competition for market share in Europe could force Russia to discount its oil in order to remain in European feedstocks, or risk being pushed out by Iran’s crude, which is similar to Russia’s Urals heavy crude oil.

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Important disclosures: The information provided herein is believed to be reliable; however, EnerCom, Inc. makes no representation or warranty as to its completeness or accuracy. EnerCom’s conclusions are based upon information gathered from sources deemed to be reliable. This note is not intended as an offer or solicitation for the purchase or sale of any security or financial instrument of any company mentioned in this note. This note was prepared for general circulation and does not provide investment recommendations specific to individual investors. All readers of the note must make their own investment decisions based upon their specific investment objectives and financial situation utilizing their own financial advisors as they deem necessary. Investors should consider a company’s entire financial and operational structure in making any investment decisions. Past performance of any company discussed in this note should not be taken as an indication or guarantee of future results. EnerCom is a multi-disciplined management consulting services firm that regularly intends to seek business, or currently may be undertaking business, with companies covered on Oil & Gas 360®, and thereby seeks to receive compensation from these companies for its services. In addition, EnerCom, or its principals or employees, may have an economic interest in any of these companies. As a result, readers of EnerCom’s Oil & Gas 360® should be aware that the firm may have a conflict of interest that could affect the objectivity of this note. EnerCom, or its principals or employees, may have an economic interest in any of the companies covered in this report or on Oil & Gas 360®. As a result, readers of EnerCom’s reports or Oil & Gas 360® should be aware that the firm may have a conflict of interest that could affect the objectivity of this report.