The ongoing JCPOA discussions, involving European countries, Russia, Iran, and, on the sidelines, the U.S., are being watched by international oil markets with trepidation. The possibility of Washington rejoining the international Iranian nuclear agreement is still in doubt, but the Biden Administration appears to be considering the move. Iran has indicated that it with only rejoin JCPOA if US sanctions on its main economic sectors, namely oil and gas, are lifted. Analysts are worried about the possible negative repercussions for global oil supply volumes and oil prices. The current global oil market is gaining stability, but a complete recovery is far from certain. It is only due to Saudi Arabia’s actions, assisted by the rest of OPEC+, that markets have been able to rebound. One of the main reasons Saudi Arabia has been able to make these unilateral production cuts is that other producers have been kept out of the market. Both Iran and Venezuela have seen their production constrained by international sanctions, while Libya and Iraq are suffering from internal strife, civil war, and political infighting. Without these players in the market, Saudi Arabia, the UAE, and Russia were able to successfully control oil markets. The lifting of Iranian sanctions under a new JCPOA deal would worry Arab producers, U.S. shale, and Russia. These worries, however, may be unfounded.
A majority of oil market analysts argue that a JCPOA success could destabilize oil and gas markets, increase price volatility, and even see a return of the pre-COVID oil gluts. There is a major flaw in this analysis though because it is based on the assumption that Iranian sanctions successfully removed Iranian oil from markets. It is certainly true that Iranian volumes are no longer at historic highs, but when looking at volumes reaching markets, Iranian oil is still very visible. Oil and tanker trackers like Samir Madani and others have been showing again and again that Iranian oil exports are not only very flexible but also increasingly aggressive. The IEA reported that “China never completely stopped its purchases (of Iranian oil)”. The OECD energy watchdog also said that Iran’s estimated oil sales to China in the fourth quarter of 2020 were at 360,000 barrels a day, up from an average of 150,000 barrels per day shipped in the first nine months of last year. Just before the JCPOA discussions restarted, Iran increased exports to China to around 600,000 bpd. OPEC also reported that Iran's crude oil output increased in March by 6.3%. OPEC tables cited in reports published on Wednesday showed that Iran’s crude output had surged by 137,000 barrels per day (bpd). OPEC tables also showed that Iran’s average output in 2020 had amounted to 1.985 million bpd, down from 2.356 million bpd recorded in 2019 and 3.553 million bpd in 2018. Major Asian clients in China, India, and elsewhere are much too happy to take Iranian volumes based on their very low price settings and attractiveness. To forget or diminish the role of Iranian oil at present in the market is a major error.
A JCPOA success would not only threaten oil prices but could also lead to an increase in Tehran’s revenue base. Currently, Iranian oil export successes are based on illegally or partly “not-known” sales to customers, at lower prices but still generating cash. If sanctions on oil exports are removed, Tehran won’t only see higher export volumes but it will also stop selling its crude at a discount. Iranian oil could, and most probably will, be priced at normal market price levels. In the short term, a potentially higher revenue stream could be generated, based on higher volumes. At the same time, Tehran should take into account the fact that customers will not be willing maybe to take Iranian volumes at higher prices. The current demand-supply situation doesn’t allow for millions of additional barrels to hit the market. In the coming months, Iranian volumes will not increase at all, regardless of how successful the JCPOA discussions are. With an overall Iran oil export potential of around 2 million bpd, while current exports are estimated at 1 million bpd, the markets will not be shocked. Demand is still weak, and it is being threatened again as COVID’s 3rd wave in Europe is blocking the opening of markets, and Asia’s emerging giant India is recording an increase of COVID casualties.
Iran’s oil potential and exports are unlikely to derail the market. Looking at the OPEC+ strategies and cohesion, another 1 million bpd on the market coming from Iran will not be a shock to the system. The market is not able to take more volumes, while Iranian clients are unlikely to be willing to increase costs. It will be interesting to watch how NYMEX-ICE investors decide to price these events into oil markets. To put shorts in the markets because of Iran isn’t currently justified. Looking at the current fundamentals, internal OPEC+ leaders are still the real power players in the oil market.
By Cyril Widdershoven for Oilprice.com
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