Global oil markets have been on edge recently due to the continuing JCPOA discussions and the possibility of the U.S. rejoining the deal. While there have been no real breakthroughs in the discussions so far, the possibility of Iranian oil exports coming back online is adding downward pressure to oil prices. Despite this added pressure, international oil benchmark Brent is still firmly above $70, and oil price optimism is only increasing. This optimism is due to the growing global demand for oil and petroleum products and is also driven by warnings from U.S. diplomats that Iranian sanctions are far from over. U.S. Secretary of State Antony Blinken stated to the press that “even in the event of a return to compliance with the JCPOA, hundreds of sanctions will remain in place, including sanctions imposed by the Trump Administration”.
This blunt but clear approach has given analysts confidence that additional Iranian oil volumes will not be entering the market any time soon. When it does enter the market, Iranian oil is almost certainly going to be priced at normal levels as Tehran will need the revenues to fund its failing economy and support IRGC linked projects and proxies. Blinken also stated yesterday to a Senate Foreign Relations Committee that Iran is rapidly developing its nuclear program. To block this, according to the Biden Administration, the U.S. needs to return to the 2015 JCPOA deal. In the view of the Democrats, the Trump sanctions and leaving of the JCPOA have been partly responsible for the current Iranian program.
Republicans, however, are still supporting a hardline approach to Iran, an approach that even some Democrats support. Democrat Senator Bob Menendez, the committee’s chairman, has been a leading opponent of the original JCPOA crafted under Democratic President Barack Obama. Republicans and several Democrats want the new JCPOA discussion to include Iran’s continued pursuit of ballistic missiles and support of proxies.
Before Blinken’s statement about sanctions staying in place, analysts had already suggested that a flood of Iranian oil was unlikely as production levels were constrained, outlets unavailable, and customers uncertain. Also, even if sanctions were lifted, Iran would potentially be part of the OPEC+ export agreement. If that were the case, it would stop a serious oil glut scenario from happening. Saudi Arabia, Abu Dhabi, and Russia would not be interested in destabilizing the oil market by allowing Iran to flood the market.
Washington has reiterated that Iran needs to let the UN atomic agency IAEA continue its monitoring activities, as stated in the agreement valid until June 24, before new talks can begin. Iran’s position on that front was weakened by the recent IAEA report which accused Iran of obstruction and not conforming to the agreement. As long as Iran is not keeping to its promises, the entire JCPOA agreement is at risk. A breakthrough this week as talks resume in Vienna is very unlikely.
Officials of the National Iranian Oil Co claimed that Tehran could restore its crude oil production within a month of sanctions being lifted. Farokh Alikhani, NIOC’s Production Deputy, stated that Iran plans to start with an increase to 3.3 million bpd in one month, followed later on by an increase to 4 million bpd. He believes that the 4 million bpd target could be reached within 3 months of sanctions being lifted. These unrealistic claims will continue to be released by Iranian officials but should not be taken seriously by analysts.
Related: Oil Prices Fall Following Large Fuel Inventory Build
Markets and participants in the JCPOA discussions should acknowledge that there is no room for maneuver right now as long as the Iranian elections are still undecided. On June 18, Iran will officially elect a new president, although the outcome of those elections is a bit of a foregone conclusion. Most diplomats seem unwilling to state that the likely election victory of hardliner Raisi, backed by Ayatollah Khamenei and considered to be a possible successor of the religious leader in the future, will put a potential deal at risk. Raisi could even use a breakthrough in the JCPOA talks to step up his radical and hardline politics.
Dealing with a radical new Iranian regime is a near certainty that no one in Washington, Berlin, London, or Moscow wants to admit to. Raisi backers have made it clear that Iran will not be bound to any further expansion of the JCPOA. The real message is that Tehran just wants to use a possible JCPOA breakthrough as a political advantage. Removal of sanctions will bring in cash, to be used not to expand Iran’s economy but to solidify the Khamenei-Raisi hardliners. Regional analysts are worried that a Biden move to join the agreement would act as a clear sign to Iran that it can proceed with all its current activities.
The geopolitical threat that the new Iranian regime poses also appears to be being overlooked by analysts. At present, Iranian naval vessels are steaming up to or are already in the Atlantic Ocean, heading to Venezuela for a possible showdown with the U.S. There are already signs that Iran will be transferring fast attack boats to the Venezuelan Navy. Intelligence sources report that a pair of Iranian Navy ships, including a frigate, has rounded the Cape of Good Hope and is believed to be making a high-seas voyage to Venezuela. The flotilla includes the Makran, an oil tanker that was converted into a floating forward staging base. Satellite pictures show that fast attack crafts are stored on the Makran. A potential military confrontation in the Caribbean is the last thing Washington is looking for right now - but it is a threat that can’t be ignored.
By Cyril Widdershoven for Oilprice.com
More Top Reads From Oilprice.com:
- Oil Could Reach $80 This Summer, But There’s A Catch
- Russia Expands Its Influence In Major Iraqi Oil Fields
- China’s Oil Imports To Drop After Refinery Margins Near $0
Iran insists on a lifting of the sanctions first before it agrees to negotiate directly with the United States. On the other hand, the United States wouldn’t lift the sanctions or even ease them without an agreement on imposing strict limitations on Iran’s nuclear and ballistic missile development programmes which Iran will never ever accede to. This the United States supported by Israel and its Arab allies in the Gulf will never accept.
Moreover, supporters of the Islamic Revolutionary Guard Corps (IRGC) are going to have a landslide victory in the presidential elections on the 18th of June. They will do their very utmost to derail negotiations with the United States unless they get a deal on their own terms.
And with the success Iran has achieved in evading US sanctions, it might consider a continuation of the sanctions a small price to pay for forcing an ejection of US forces from Iraq, Syria and ultimately the whole Middle East thus achieving a spectacular geopolitical victory over the United States.
If in the very (very) unthinkable possibility the sanctions were lifted, Iran could only bring 650,000 additional barrels a day (b/d) to the market. The reason is that Iran has been managing with help from China to export 1.5 million barrels a day (mbd) or 71% of its pre-sanction exports of 2.125 mbd. The 650,000 additional barrels a day are the difference between Iran’s exports pre-sanctions and those under the sanctions. With the global economy growing at 6.3% this year according to the IMF, the global oil market can easily absorb these additional barrels without even a whimper.
The highest production Iran could achieve if ever the sanctions are lifted is 3.75-3.80 mbd. Iran is yet to manage to produce the production quota of 4.0 mbd allocated to it by OPEC.
Dr Mamdouh G Salameh
International Oil Economist
Visiting Professor of Energy Economics at ESCP Europe Business School, London