BY: Ebrahim Fallahi

‘Lack of “futures”, main barrier in the way of IRENEX success’

November 26, 2019 - 15:17

TEHRAN – Nearly a year after National Iranian Oil Company (NIOC), for the first time, decided to offer crude oil and gas condensate at Iran Energy Exchange (IRENEX) as a new strategy to relief the pressures of the U.S. sanction, unfortunately no more than two million barrels have been sold.

Recently, NIOC revised the regulations pertain to the offering of oil and gas condensate at IRENEX, for a second time, to encourage more domestic buyers to get involved in the trades.

In this regard Tehran Times conducted an interview with Reza Padidar, the chairman of Tehran Chamber of Commerce, Industries, Mines and Agriculture (TCCIMA)’s Energy Committee. What follows is a gist of the interview.

Lack of “futures” 

As mentioned earlier, offering oil and gas condensate at IRENEX, so far has not reached the success that the government expected.

In mid-May, after several unsuccessful offerings, NIOC decided to halt the process to prepare new guidelines for the later offerings. 

However, once gain the new regulations didn’t make a great difference in the trade outcomes and the following offerings were also unsuccessful.

Asked about the reasons for these continuous unsuccessful cycle, Padidar said one of the main barriers in the way of the success of Iran’s oil and gas condensate offering is that IRENEX is not a “futures” exchange.

A futures exchange or futures market is a financial exchange where people can trade standardized futures contracts; that is, a contract to buy specific quantities of a commodity or financial instrument at a specified price with delivery set at a specified time in the future.

At IRENEX, such trades are not yet allowed, and the sales and offerings are solely made based on instant trade.

“So we can say that the key problem, which also entails almost all the other issues that the traders are facing in IRENEX, is the lack of futures trades,” he said.

In any standardized exchange markets, traders are able to trade their futures contracts instead of being obliged to receive the physical cargo based on and specific time table.

 Offering methods vs. market realities

Another important reason for the failure of the oil offering at IRENEX is that the government did not consider the realities of the Iranian market and the conditions of the traders in setting the regulations and guidelines for the offerings.

for instance, based on the NIOC new guidelines the least amount of purchase is set to be 35,000 barrels while the least amount that a vessel in Iran would transport (to be economically justifiable) is 700,000 barrels, he explained.

So the buyers would have to wait several weeks or even months for their cargos to reach the minimum range for shipping which is 700,000 barrels; and this is not efficient in any sense, since the market changes on a daily basis.

According to the new revisions, applicants have to initially pay six percent of the value of the contract in the form of rial or other acceptable foreign currencies and in case their bidding is accepted they must pay another 20 percent to finalize their purchase and the rest would be paid within three months before loading the purchased cargos.

Another problem which the buyers were facing was the short period of time within which they had to load their cargo after finalizing their purchase.

Brokers and credit lines

Yet another problem was regarding the limitations pertain to the brokers approved by IRENEX that would do the financial transactions for the buyers.

“Since currently the number of brokers approved by IRENEX for making the financial transaction do not exceed 18 or so,” he explained.

According to Padidar, in most of the stock markets around the world, brokers are able to open credit lines for certain traders so that they could make their purchases and do their payments in the exchange market without losing any time. 

“However, this is not the case for IRENEX and its affiliated brokers, there are no credit lines allocated for the Iranian buyers who participate in IRENEX trades and they need to make all the necessary payments themselves within the timeline determined by NIOC,” he said.

The solutions

As we discussed some of the problems regarding the offering of oil in Iran’s energy exchange, the solutions to these problems seem to be self-explanatory.

According to the chairman of TCCIMA’s Energy Committee, the new revisions and the new guidelines presented by the oil ministry could make a significant difference in the future of IRENEX.

“It is very important, if the necessary changes are considered and included in the procedures, it would be a very positive step toward a better future for IRENEX trades,” he said.

Some changes have already been made in the new revisions, for instance the amount of the advance payment, the time table and due-dates for the payments and loadings are also reconsidered; however, some bigger issues are still remained to be taken into account.

The private sector

As the final question, I asked the official about the private sector’s expectations from the government regarding facilitating the participation of their participation in the country’s oil industry.

According to the official, one of the most important steps that the government could take in order to encourage the participation of the private sector in the oil trade would be to pay its debts to them in the form of oil, gas condensate or other oil products which are being offered at IRENEX.

Padidar believed that the private sector would eagerly welcome such an idea, since in fact they are not sanctioned and could trade the mentioned crude oil or condensate for their necessary raw materials and basic goods.

“In this way, both the government and the private sector would benefit mutually and it will also promote more trades at IRENEX,” he said.

EF/MA

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