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Goldman: OPEC Needs To Do More To Restrain Shale Oil

Investment bank Goldman Sachs advised…

Gregory Brew

Gregory Brew

Gregory Brew is a researcher and analyst based in Washington D.C. He is currently pursuing a PhD at Georgetown University in oil history and American…

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Is Iran Planning On Breaking Its OPEC Pledge?

Ayathollah

According to a provision of the recent OPEC production deal, the Islamic Republic of Iran is mandated to keep production below a threshold of 3.797 million bpd. Yet this figure is below the regime’s desired long-term goal of 4 million bpd, the level Iran once produced at before sanctions were imposed in 2012.

That goal now looks within reach, as Oil Minister Bijan Zanganeh told the press after an Iranian cabinet meeting that crude production had reached 3.9 million bpd. The increase came as Iran restores links with energy markets in Asia and Europe, and is the culmination of a year-long effort to boost production since sanctions on the country’s energy industry ended last January.

Does this mean Iran plans to break the rules of the OPEC cut and push to 4 million bpd all year long? It’s possible that the country’s bullish oil administration, led by Zanganeh, sees the OPEC deal as a temporary measure, one which Iran can use to its advantage. It has already used the cuts from other countries to boost market share: early in January, it was reported that Iran had sold 13 million barrels held in tankers, part of its floating storage which now amounts to about 16 million barrels.

News that Iran was close to 4 million bpd came along with reports that two crude carriers were en route to Rotterdam, carrying the first cargo of Iranian crude to that port in five years. The tankers are scheduled to arrive February 7 and 11. Deliveries from these two tankers will bring Iranian exports to Europe to over 600,000 bpd, an indication that Iran is regaining market share in the continent. Iran in 2011 exported nearly 1 million bpd to Europe, before sanctions imposed the following year cut Iran off completely from the European market. Related: Experts See Higher Oil Prices But Surging Shale Is A Concern

There are signs that output will continue to rise in February, as Iran schedules its first shipment to Indonesia since sanctions were lifted.

Given the current market climate, with the OPEC cuts being offset by resurgent American production and a rising rig count, it’s possible that Iran may face problems holding its current level, roughly equal to the country’s production threshold before sanctions went into effect in 2012.

Despite rising production, total Iranian oil exports have been slipping since a high was reached in September 2016. Exports of crude excluding condensate hit a five-month low in December according to Reuters, falling to 1.88 million bpd from 2.04 million in November. Exports of crude plus condensate in January, according to Reuters, topped out at 2.16 million bpd, with February expected to average 2.2 million bpd.

The good news for Iran is in shipments to Asia, by far Iran’s biggest customer, which are set to increase in February. Crude imports by Asian countries were way up in 2016, having fallen precipitously since 2012, and Iran’s deputy oil minister Abbas Kazemi expects them to go up even more. They’re expected to reach a three-month high of 1.5 million bpd, crude and condensate, in February. Related: ‘Good’ OPEC Compliance Pushes Oil Prices Higher

There are signs that Iran is having trouble finding enough customers, as its export level hasn’t quite reached the high of September 2016. It’s also not entirely clear if the country intends to continue boosting production past the threshold agreed upon in November, where Iran won a considerable victory: while most OPEC members were forced to cut production, Iran was free to continue increasing production as a means of regaining market share lost in 2012.

From the Iranian point of view, reaching 4 million bpd in February doesn’t exactly break the OPEC deal. The Iranian year 1395 ends on 20 March, and the regime’s goal is to reach 4 million bpd before that date, largely for political reasons. If the OPEC deal looks likely to hold this spring, it’s entirely possible that Iran will abide by the compact reached in November and bring its crude production down below 3.8 million bpd, in order to strike a year average at that level, in accordance with OPEC’s agreement. Then again, with the long-term viability of the OPEC deal uncertain, it’s also possible that Iran will start cheating, or may even discard the agreement entirely in a bid to keep clawing back market share lost in previous years.

By Gregory Brew for Oilprice.com

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  • Dan on February 01 2017 said:
    The sky is falling. The sky is falling.

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