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Iranian Crude may be Vital as Global Producers Fail to Meet Targets

There has been considerable comment this week over the telephone call between President Obama and the President Rouhani of Iran. Certainly the election of a new President in Iran gives the opportunity for a fresh start, particularly given the belligerent attitudes of his predecessor. However the cynical side of me does wonder if there is more driving this than simply the change of personalities.

There are two points that need to be considered, as a possible new relationship between the two countries might slowly coalesce out of the mists of diplomatic effort. Firstly the major driver seen in moving Iran toward a more positive position is said to be the increasing bite that sanctions, and particularly oil sanctions, are having on their economy. As sanctions have tightened, so Iranian oil production has fallen, with reports suggesting that oil exports have fallen from 2.2 mbd to May’s value of 0.7 mbd. The reduction in income that this has had on the Iranian economy is significant, with the currency officially devalued to half, though the effect has been more of an 80% fall from peak, as inflation has reached 42%.

Easing sanctions to allow more oil flow would significantly improve the situation, although there is concern, expressed for example at CNN, that the increase in oil flow would weaken the positions of the Kingdom of Saudi Arabia and Iraq. They suggest that the advent of Iranian oil (presuming that they can bring 1.5 mbd to the market relatively quickly) is foreseen as having a potential impact on the United States in that it may, at least transiently, produce a glut in the market. That would drive down prices, until such time as KSA could drop production and bring the supply and demand back into balance, raising prices back to around $100.

In a peaceful world such a scenario might have some viability, but consider what is really happening in the world of global supply. Instead of the KSA moving toward a supply of 12.5 mbd (which was only a capacity number in the first place) they have backed this down to 12 mbd and have talked recently as lowering that number further as they hire more and more rigs to help sustain existing production at just under 10 mbd. Iraq, which was promising to rapidly increase production toward a target of 11 mbd, is instead considered by the IEA likely to reach no more than 6 mbd by 2020. Further with the ongoing increase in violence in the country being able to sustain current production at around 3 mbd and increase it beyond 3.5 mbd as the Majnoon field comes on line. However Shell’s target for the field is already below initial estimates for this year, and it is discussing lowering the 2017 target from 1.8 mbd to 1.0 mbd. There has recently been an outbreak of violence in Kurdistan, which might portend that even in this relatively stable part of the country oil production and security is becoming a greater target.

These events suggest that future increases in production from around the region are not as assured as one might hope. At the same time, while there are those who continue to expect the United States to become oil-independent in the next few years, the reality is somewhat different, and further increases in production much above current figures become more difficult to justify. If Russia, similarly, is unlikely to increase production – which it is not – then the questions that should be asked are rather where is the world going to get the additional 1 mbd that it requires every year to balance increasing demand against supply.

Related article: Record Oil Outputs in Saudi Arabia Fail to Ease Shortage Anxiety

Over the course of this year Saudi Arabia has had to increase production from 9.1 to 9.96 mbd to keep supply in balance, and prices stable. At the same time production from Libya, which has run at around 1.6 mbd had fallen to 150 kbd at the beginning of this month. Hopes that this could be increased back up to 700 kbd rely on tribal militias that control strategic parts of the country, and their long term co-operation is dubious, while the fields and pipelines in the east remain shut down. It seems reasonable to anticipate that there will be at least a million barrels a day of Libyan production held off the market for some time.

If one goes around the world one sees that Brazilian promises of production increase are behind schedule, as are promises of production increases from countries such as Veneuela. And suddenly one is left with not much in the way of places left to balance off the current declines in supply and increases in demand.

At this point that 1.5 mbd of potential supply from Iran starts to look a little more promising as an answer. It might allow KSA to ease back on production levels that might be starting to impose a little strain on their infrastructure. It would help to provide balance if production increases around the world fail to show on time. One should recognize that negotiations to bring Iran back into the fold are going to take at least a year or two before it is realistic to anticipate full return to supply, but even the easing of sanctions a little might cause the flow to China, India and Asia to increase to meet the burgeoning demands that they have, and oil is still to some degree fungible.

But in that regard, Iran has also just recently reached 100% output from the first of the nuclear power stations at Bushehr and is about to start construction of the second unit. Nuclear fuel will be provided by Russia, and spent fuel returned to Russia. It is a 1,000-megawatt unit, and since the unit was built under supervision by the International Atomic Energy Agency it is not subject to sanctions.

 Bushehr Nuclear Plant
Figure 1. Bushehr Nuclear Plant

If the protocols that worked to make this happen can be expanded, then it is possible that, though negotiation, the tension in the region can be eased. This could well have benefits all around, most particularly for ensuring that, for at least a sadly few more years, there will be enough oil on the market to meet demand at a reasonable price.

Related article: Shell Abandons 800 Billion Barrel Deposit, Beaten by the Regions Geology

Location of the Bushehr Plant
Figure 2. Location of the Bushehr Plant

By. Dave Summers

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  • Lynden on October 04 2013 said:
    Nice article. I am so pleased to see a possible thaw and resolution to this really idiotic situation. I never bought into the fear mongering over Iran. Most Americans just don't realize how long the Persian civilization has been around.

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