Sanctions on Iranian oil stir up corner of market

Effects of the U.S. decision to renew sanctions on OPEC member Iran are already spreading beyond the world of crude to some corners of the oil market.

Refiners in South Korea, a U.S. ally as well as one of Iran’s largest customers, are shunning a type of oil known as condensate from the Islamic Republic to feed the nation’s petrochemical plants, and instead buying unusually large amounts of a processed fuel known as naphtha from elsewhere.

SK Innovation Co., Hanwha Total Petrochemical Co. and Hyundai Oilbank Co. have all rushed to procure supply for the next two months.

While the U.S. and buyers of Iranian crude are yet to decide on potential limits to purchases from the Middle East nation, South Korea’s preemptive move signals the widespread shifts in trading strategies that the American sanctions may spur in the oil market.

If condensate cargoes are restricted by the measures, that would be a “disaster” for Asia, as importers in the region would be affected the most, industry consultant FGE said last month.

“The South Koreans are currently faced with tighter supplies of condensate from other sources outside Iran, and this has forced them to turn to naphtha as an alternative and replacement to South Pars cargoes,” said Den Syahril, an analyst at FGE.

Refiners in South Korea will make a final decision on whether to buy Iran’s South Pars condensate for the third quarter only after negotiations between their government and President Donald Trump’s administration are completed, people with knowledge of the matter said earlier this month. Meanwhile, they haven’t bought supplies for July.

What they are buying is naphtha, and a lot of it.