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Michael McDonald

Michael McDonald

Michael is an assistant professor of finance and a frequent consultant to companies regarding capital structure decisions and investments. He holds a PhD in finance…

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Iran Surprises OPEC With A Further 250,000 Bpd Increase

President of Iran, Hassan Rouhani, was poised to announce on Sunday that the nation has increased oil production by 250,000 barrels per day. This was accomplished through the creation of three new fields west of the Karoun River. The addition in production was highly unexpected, especially to neighboring OPEC nations. As of this past Wednesday, Brent crude oil futures have dropped a substantial amount to under $44 per barrel.

Three publicly traded companies on three separate exchanges have paid as much as $3 billion to obtain these fields. Sinopec from China has acquired the largest, producing 115,000 barrels per day. China’s National Petroleum Corporation bought the second largest field and the third was given to Persia Oil and Gas Development of Iran. All three of these companies stand to profit from these fields. Iran is in the process of ramping up production to reach their prior unsanctioned levels, which would place the oil majors in a crucial position to grow.

Total SA has also entered into an agreement with Iran, reinvesting efforts and $4.8 billion into projects previously explored to the sanctioning of Iran. Total plans to produce 2 billion cubic feet of natural gas per day at the south pars gas field offshore. Total is simply another one of the firms that will likely profit from Iran’s expected rapid growth.

Iran only wishes to return to their production level of 12 percent of OPEC’s total production. As of October, OPEC’s production levels were at 33,643,000 bpd and Iran produced 3,690,000 bpd, or nearly 11 percent. Last month, Iran would have needed about 350,000 bpd more in oil to reach their goal. The 250,000 bpd created from these three new fields will put the country close. President Rouhani wants to increase production of this new region to over one million bpd, a conceivable figure.

Saudi Arabia, Iran’s closest rival in oil production, is unhappy to see Iran’s advances. More competition means fewer profits for Saudi Arabian oil majors like Saudi Aramco. The company is privately owned but there is potential for an IPO in the next year or two. It would be in investor’s interest to short their currency, the Saudi Riyal, while holding long positions in the companies maintaining the three new fields mentioned above. Related: ExxonMobil Is Digging Its Own Grave

OPEC is planning on excluding Iran from the production cut to allow them to regain their market share. However, if Iran is to achieve their ambition faster than expected, OPEC may consider including them. OPEC is meeting once more on November 30th to continue discussing the planned cuts. OPEC has mentioned previously they wish to limit oil production to less than 33 million bpd, a number that is becoming more and more unlikely as production further accelerates.

A continued inundation of supply for crude oil will only lower the price of oil further. Economists are skeptical that a deal will be approved at the end of the month meaning oil prices could fall as low as $40 per barrel. If a deal were to remarkably emerge, this could result in a price surge. As we get closer to the meeting, investors should prepare their portfolios with straddles or, for the confident speculator, a spread in the direction of their interests.

By Michael McDonald of Oilprice.com

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