Brent crude and WTI prices: European markets won't be hit by a flood of Iranian oil anytime soon

Amrik Sembi
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Iranian Revolutionary Guards drive a spe
It's a different story in the Middle East (Source: Getty)

The sustained oil sell-off was one of the biggest shocks of 2015, and it also looks set to be one of the defining characteristics of the global economy in 2016.

So it's easy to understand the panic when economic sanctions on Iran were lifted, allowing the country to export oil again, and adding yet more crude to an already oversupplied market.

However, it will actually be some time before the UK or Europe feels any significant effect from Iranian crude.

Read more: Brent crude falls back below $40 in choppy trade

For a start, conversations about crude are always in terms of quantity over quality, but really we must look at both. Not all crude is created equal, and neither are the refineries that process it.

The European market is used to light sweet crudes - the high quality typically found in the North Sea and US Gulf Coast. Iran however typically produces a sour crude.

Refineries can change their setup, but with prices this low, and so much product on the market, Iranian refineries are unlikely to do so soon.

Then there’s the fact that European refiners are also restricted by various regulations on quality and pollution - standards that Iranian crude often falls short of.

Even if they did decide to use it, regulations such as the EU Emissions Trading Scheme push up the price of using lower quality crude, making it unattractive when even the high-grade stuff is so cheap.

There’s also the fact that Iran is still quite far away. The cost of moving crude around the globe is significant, and let’s not forget that the flooded market means a huge amount of crude is already held in European storage.

Read more: Goldman Sachs says commodity price rally won't last

If you’ve got lots of cheap, better quality product that you don’t need to pay to ship or change your setup for, that’s what you’re going to use.

But the Middle East is a different matter. Within the region there are refineries in UAE, Saudi Arabia and Bahrain for example, all geared up to take on Iranian crude.

Of course, this means that there will be some oil somewhere else that they don’t buy, which could affect the European market slightly, but we’re a long way away from the Iranian oil flood some would have us worry about.

City A.M.'s opinion pages are a place for thought-provoking views and debate. These views are not necessarily shared by City A.M.

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