Iran to consider oil output cut

IRANIAN CUT: Iran's President Ahmadinejad was quoted as saying Tehran was studying a plan to cut output. (Getty Images)

Money, not politics, is behind Iran's review of oil output levels, say refiners that buy crude from Opec's second biggest producer.

US crude jumped to a record near $127 a barrel on Tuesday after Iran's President Ahmadinejad was quoted as saying Tehran was studying a plan to cut output.

Some traders leapt to the conclusion Ahmadinejad was pursuing his dispute with the US, which has taken issue with the country's nuclear programme.

But Iranian oil ministry officials and customers said Iran is only reviewing its output because stocks have swollen.

Refiners are refusing to pay up for heavy Iranian crude that is difficult to convert into transport fuels and Iran is refusing to cut prices further.

"This is about the price and quality of the oil," said one buyer of Iranian crude. "This crude is a nightmare for refiners. There is a price for everything and if they want to get rid of the stuff they will have to stomach selling at a lower price."

Refiners said they were not under political pressure to stop buying Iran's oil. Such pressure from the US has impeded fuel sales to Iran and kept international companies from investing in new oil and gas projects.

"We've told them we'll buy it at the right price," another buyer said.

Iran would not want to lose out on potential oil revenues with a politically-motivated cut while oil prices were near record highs, an Iranian oil ministry source said.

"It would be too great a loss economically to us. If oil was going to be used as a weapon it would have been used a long time ago, not now," the source said.

Iran has leased a fleet of giant crude vessels to sit offshore holding the crude it has yet to sell. The ships can hold more than 30 million barrels of crude, more than a week of Iran's oil output. Shipping sources say they are nearly full.

The speed of the build up has puzzled oil traders. Iran has trimmed oil exports by about 200,000 barrels per day (bpd) since early April to match a fall in international demand as refiners undertake seasonal work.

The adjustment would only account for around 8 million barrels of the stored crude, which shipping and trading sources said has built up over the past six weeks.

Much of the crude on the tankers is from the Soroush and Nowrouz fields, which produce around 190,000 bpd.

Iran faced a similar situation in July 2006, when it held around 20 million barrels in tankers. That crude was sold at a steep discount, mainly to India and Royal Dutch Shell.

Iran would need to cut another $6-$10 a barrel from its Soroush price to encourage sales, one refiner said. The official Soroush price for June is already a deep discount of $20.25 to the North Sea benchmark, he added.

Opec has rebuffed repeated calls from consuming nations for more crude to try to lower the high price, arguing that oil markets were well supplied.

The crude in storage off Iran to an extent backs Opec's claims, but it is the wrong kind of oil.

Refiners need more of the crude they can easily process into diesel and gasoline for the summer, and less of the heavy crude that makes up most of Opec's spare capacity.

"Believe me, if this was light Nigerian crude it wouldn't be sat on a ship," said one trader. "We'd have bought it."

Another problem for Iran is that sanctions prevent US refiners from buying its oil. This reduces the pool of buyers with the complex units necessary to process the heavy crude. (Reuters)

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