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Crude oil trading at Kish Exchange failed because of high price and lack of discounts

Business Materials 16 July 2011 14:39
Trading at the Kish International Oil Exchange in the first day of its operation has failed because of the higher price as compared with the international value and the refusal of Iran's Oil Ministry to offer discounts to potential buyers, U.S. Northeastern University Professor Kamran Dadkhah believes.
Crude oil trading at Kish Exchange failed because of high price and lack of discounts

Azerbaijan, Baku, July 16 /Trend T.Konyayeva/

Trading at the Kish International Oil Exchange in the first day of its operation has failed because of the higher price as compared with the international value and the refusal of Iran's Oil Ministry to offer discounts to potential buyers, U.S. Northeastern University Professor Kamran Dadkhah believes.

"The reason that the deal didn't go through was that the price demanded by the Oil Ministry was higher than the international price. Furthermore, potential buyers pointed out that due to international sanctions and restrictions on transfer of money for Iranian enterprises, they should receive further discount but the Oil Ministry did not agree," Dadkhah wrote to Trend in an email.

The Kish International Oil Exchange was officially inaugurated on July 13, with 600,000 barrels of heavy crude oil being offered for sale at the base price of $112.60 per barrel. However, no dealer was ready to pay above $109.65, so no transactions were carried out.

During the inauguration ceremony of the Kish Exchange, President of Securities and Exchange Organization of Iran Saleh Abadi noted that in the near future the regional price of oil will be set at the Kish exchange.

According to Dadkhah, Abadi's notice is "a pipe dream".

"In order for the exchange to have any serious function, Iran has to be free of international sanctions particularly financial restrictions," he wrote.

Iran's refusal to abandon its nuclear activities has resulted in resolutions adopted by the UN Security Council in 2010, as well as additional unilateral sanctions approved by the U.S. Congress and the foreign ministers of all EU countries, which were primarily directed against the banking, financial and energy sectors of Iran.

Restrictions imposed by the EU include the ban on the sale of equipment, technologies and services to Iran's energy sector which is a major source of revenue for the Iranian regime; the same measure refers to the refining industry.

Further, Dadkhah believes, Iran has to have amicable relationship with other oil producers of the region such as Saudi Arabia, Kuwait, and Iraq.

"Even if all these conditions are met, still price of oil will be determined in established markets of New York and London not in Kish. But for Mr. Ahmadinejad and the Iranian government, appearances and propaganda are everything," he told.

According to Dadkhah, the exchange also will provide the opportunities for cronies of the Iranian power elite and friendly companies to act as middlemen and reap substantial profits.

"As was illustrated in the first day of trading, there is no way that anyone would pay for oil more than the international price," he told. "But as buyers' arguments showed, there are many reasons to ask for substantial discounts from the Oil Ministry. Furthermore, there are many ways to refund the buyers under different pretexts and under the table."

Dadkhah noted that Iranians would have been better off if the government tackled real economic problems including inflation, unemployment, and international sanctions.

"It is likely that in the future the government intervenes and makes the sales possible.

"Nevertheless, the whole enterprise of the Kish Oil Exchange is a sham. The government has two objectives: propaganda, and finding an outlet to reward friends and cronies," he concluded.

The Iranian Oil Exchange establishing euro and dirham (ADE) based pricing of oil opened on February 2008. Iran inaugurated the new phase of oil exchange with vast opportunities for foreign companies in 2010.

The Kish Exchange has traded oil-derived products until Iran included cruel oil and fuel oil on OIB product selling list.

Iran began offering fuel oil contracts on the oil exchange in April.

On June 1, Iran commenced the first oil exchange when by offering 35,000 tons of oil liquids, whilst the trading session failed due to price disagreements. The Bandar Abbas Oil Refining Company (BAORCO) put 35,000 tons of oil liquids at the price of $623.35 per ton. The customer's price offer from $610 to $622.85 was rejected.

Later, on June 8, despite having two demanding customers Iran's second furnace fuel oil cargo at $644.58 per ton failed to trade at Kish Island.

Two customers expressed readiness to buy 70,000 ton fuel oil from Bandar Abbas oil refinery. However it did not sell as one of the applicants offered $640.58 while the other costumer offered $636.

On June 14, Iran's third attempt to sell furnace fuel oil cargo was a success on international oil exchange. The Iranian oil exchange could sell oil batch in the third attempt thanks to agreement of a seller - BAORCO - to reduce prices.

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