Iran has been storing straight-run fuel oil on supertankers for at least three months, in an unprecedented move prompted by China's poor feedstock demand and financing difficulties faced by buyers due to Western sanctions, industry sources said.

At least 550,000-600,000 tonnes, two full VLCC loads, are being held at sea at any one time, traders said.

So far, two cargoes have been sold and delivered into Singapore on board Very Large Crude Carriers (VLCCs), a shift from its normal practice of using 80,000-tonne aframaxes.

Traders said demand from 'teapot' refiners in southern China, which used to buy two to three cargoes a month some two years ago, have dried up. Since January, only one cargo was lifted by a Chinese player, Tianbao, in April.

The unusual move by Iran was also prompted by increasing difficulty faced by some term buyers in getting credit from Western banks for trade with Iran due to sanctions, traders added. Iran has been storing crude oil on tankers in recent years.

At least one of the VLCCs carrying straight-run fuel oil from Iran's Bandar Mahshahr port has landed in Singapore for the first time, while a second is on the way, increasing supplies in a weak Asian market damped by poor sentiment.

'NIOC (National Iranian Oil Co) have been unusually flexible with their fuel oil recently -- as long as buyers are keen, prompt loading dates and the size of the cargoes are not a problem,' a Singapore-based Asian trader said.

'That's because they are floating the oil on their VLCCs and it's ever-ready for loading.' For example, Iran can still move to load for prompt mid-September shipments, he added.

The second parcel is on board the 270,000-tonne 'Nesa', which is expected to land Singapore on Sept. 10 and chartered by China's Zhenrong, which had been a term buyer of the 280-centistoke (cst) Bandar Mahshahr cargoes before this year.

The first cargo, which was loaded on board the 'Dadgar' in June, was sold to term buyer Shell, who normally lifts two to three aframaxes in a month, mainly as feedstock.

The cargoes, typically transported by 80,000-tonne aframaxes, are either used as refinery feedstocks or as blending components, due to the grade's low-density properties.

Feedstock demand poor

In the absence of Chinese feedstock buyers, the value of the cargoes have plummeted because the monthly supply of eight to 10 cargoes far exceeds demand.

Its only other usage is as a density blendstock but the market has not faced a shortage of this material this year, driving its value lower.

Traders said the cargo is valued at a discount of $4.00-$5.00 a tonne to Singapore spot quotes on a cost-and-freight (C&F) Singapore basis, as a blendstock. This compares with a premium of $7.00-$8.00, C&F Singapore, if its used as a feedstock.

Some Middle East buyers, including an unidentified customer, has faced problems with Western banks in financing Iranian cargoes due to UN sanctions. At least one term buyer has not been able to lift the cargoes for the one to two months, traders said.

'The Iranians have been very particular about price in the past, they would rather not sell than to sell cheap. That's why they ended up with so much supplies that they had to store the cargoes on their VLCCs,' another trader said.

'That they are being as flexible as they are now, would imply that either they are running out of ships to store the cargoes or from a cost-perspective, they are well in the money.'

Traders said NIOC is also offering 380-cst cargoes, likely from its Bandar Abbas refinery and typically sold only into the Middle East bunkers market, along with the straight-run barrels.

The state firm has sold a monthly average of 510,000 tonnes of cargoes from Bandar Mahshahr this year up till July, with monthly volumes fluctuating from a high of 730,000 tonnes two months ago to a low of 250,000 tonnes in January, shipping sources said.

In July, it also conducted five Ship-To-Ship transfers using the aframax 'Four Bay', which traders said have discharged in the Middle East, the sources said.

The additional cargoes from Iran, along with rising supplies from Saudi Arabia as the kingdom emerges from peak seasonal summer demand, is set to further depress the Asian market. – Reuters