China pays record crude premium to cover Iran supply

Chinese trader Unipec paid a record premium for a February cargo of Russian crude, as the world's second largest oil consumer looks to cover for reduced Iranian supplies.

China slashed Iranian crude imports by more than half for January as the two haggle over 2012 payment terms, industry sources have told Reuters. The latest deals show that the dispute could be dragging on into talks for February cargoes.

Tehran is facing tougher sanctions from the West that could hurt its oil exports into Europe and Asia, giving top Iranian crude buyer China a strong hand in contract negotiations as one of a shrinking group of customers.

China appears prepared to pay up for alternative crude supplies to keep Iran under pressure. Unipec, the trading arm of top Asian refiner Sinopec, won the cargoes of Russian Espo crude from Rosneft by paying nearly a dollar per barrel more than other refiners have paid recently for the same crude.

"They are prepared to pay extra to get supply from Kozmino as crude from West Africa and the Middle East will take a longer time to get there," Roy Jordan, London-based consultant at Facts Global Energy said, referring to the shipping port for the Russian crude.

"Espo is an obvious replacement because it is conveniently located and it's a better quality crude."

China, which bought nearly 11 per cent of its oil from Iran in the first 11 months of 2011, is Iran's top trading partner and has resisted UN sanctions that include measures targeting the Islamic Republic's oil sector. It has also criticised sanctions imposed outside of the UN framework.

US President Barack Obama signed into law on Saturday new sanctions that could hurt Tehran's oil exports by preventing refiners from paying for the oil. The European Union is due to consider similar steps soon as Western powers look to isolate Tehran over its disputed nuclear programme.

Tehran has warned it could shut the Strait of Hormuz, a shipping chokepoint through which more than 40 per cent of the world's oil is shipped, if sanctions were imposed on its crude exports.

Iran flexed its military muscle on Sunday when it announced a nuclear fuel breakthrough and test-fired a new radar-evading medium-range missile in the Gulf on Sunday.

Brent crude rose over 2 per cent on Tuesday in response to the escalating tension to more than $110 a barrel.

To replace the Iranian crude, China has been buying spot cargoes from the Middle East, Africa and Russia, after cutting its January Iran purchases by about 285,000 barrels per day (bpd), more than half of the close to 550,000 bpd that it bought through a 2011 contract.

Unipec bought the two 730,000-barrel Espo cargoes in Rosneft's tender to load on February 13-16 and February 25-28, traders said on Tuesday.

Rosneft sold one cargo at a premium of $6.85-$6.88 a barrel to Dubai quotes, the highest fetched for the grade since exports started about two years ago, they said.

The other parcel was sold at a premium of just above $6 a barrel to Dubai quotes, similar to other trades for February, traders said. This brings Unipec's total Espo purchase in February to 3 cargoes, after it bought a cargo from another Russian producer TNK-BP at about $6 a barrel above Dubai quotes last week.

"It's a bit of a surprise that Russian grades such as Sokol, Vityaz and Espo are still at these kind of levels considering that we are starting to enter the maintenance season," a trader with a European firm said.

China will load an additional 12.43 million barrels of crude from Iraq, Russia and West Africa in January, more than covering the supply cut from Iran, according to trade sources and shipping data.

Unipec had bought 4 cargoes of Espo crude for January loading, up from the usual 2-3 parcels a month, traders had said.

If the dispute can be resolved, this would be a relatively short-term switch to other supply, Facts' Jordan said, adding that the issue could be resolved by the end of the first quarter.

Oil output in Russia edged up 1.2 per cent to reach a new post-Soviet high of 10.27 million barrels per day (bpd) last year, as the world's top crude producer eased tax burden and launched pipeline flows to China, the Energy Ministry said.