Any attempt by Iran to sell to China millions of barrels of ultra light crude built up in tankers over the last 2-1/2 years of sanctions is likely to be thwarted by poor refining margins and an outage at a major importer of the oil.

Traders and company officials say Iran has little choice but to target China to buy the crude known as condensate because the world's No.2 oil consumer in the past has been quickest to raise imports when conditions were in its favor.

Other Asian buyers in Japan and South Korea said their governments have yet to approve taking more crude from Iran as the nuclear deal between Tehran and world powers still has to be approved by the U.S. Congress and the Islamic republic's Supreme Leader Ayatollah Ali Khamenei.

However, China as well may not be keen on taking more condensate.

Poor refining margins for naphtha and gasoil - the main products made from the oil - have dampened demand for the grade. And a major buyer of condensate, China's Dragon Aromatics, has been shut by a fire since April and is not expected to restart in the next two months.

"Looking at current margins, the chances that we will cut (refinery) runs are higher than those of increasing runs," said a trader with a Chinese refiner that processes Iran's South Pars condensate.

The National Iranian Oil Company (NIOC) has stored some 40 million to 50 million barrels of oil onboard ships, and at least one of the Iranian supertankers used for storage - the first to sail since the nuclear deal - is heading towards Shanghai.

It is not clear what product or crude the tanker Starla is transporting, but Iranian officials said last week the oil in floating storage is either fuel oil or condensate, with the latter accounting for around 30 million of the barrels.

Under the deal reached on July 14, Iran agreed to curb nuclear activity in exchange for an easing of the sanctions that have cut its oil exports by more than half since early 2012.

CONDENSATE PREMIUMS UNDER PRESSURE

NIOC used to sell around 66,000 barrels per day (bpd) to Dragon Aromatics on a delivered basis, so it's up to Iran to find homes for any unwanted cargoes, traders said.

"If NIOC fails to find a new buyer while maintaining condensate production, it would be under tremendous pressure to place the cargoes," said a Chinese trader who deals with Iran's South Pars light crude.

The condensate, named after an offshore gas field that produces about 300,000 bpd of the oil, has a high sulphur and toxic mercury content, making it a tough sell in China amid stricter environmental regulations, traders said.

Asia's largest refiner Sinopec, a regular lifter of South Pars with a contract to buy about 70,000 bpd, has cut down imports during the summer months due to complaints of foul-smelling sulfide, traders said.

That leaves NIOC looking for more storage space for the light oil after earlier leasing tanks for condensate at Dalian port in northeast China. Another storage operator in eastern China is also exploring opportunities to store the South Pars oil, a company source said.

Iran may have to sell its excess oil at wide discounts to the Dubai benchmark to attract buyers as it could lose more money storing easily evaporable condensate, traders said.

Any such sales could depress prices for other condensate producers such as Qatar and Australia, the traders said.

Qatari condensate premiums have already fallen to six-month lows for cargoes loading in September on weak demand in Asia due to poor refining margins. [CRU/TENDA]

China's Iranian crude imports including condensate rose to the second highest this year at 671,800 bpd in June, customs data showed.

Source: www.reuters.com

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