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Gaurav Sharma: Discussing OPEC's Iranian Oil Conundrum


Joe Klamar / AFP / Getty Images

Iran's Oil Minister Bijan Zangeneh speaking at
the 167th ordinary meeting of OPEC  in Vienna on June 5, 2015.

At OPEC's latest meeting, bar the odd murmur, hardly any of its 12 members fell out of line and took a unanimous decision to hold the production quota at 30 million barrels per day (bpd). In any case, there was no sense in rocking the boat when the market appears to be stabilizing with Brent holding firm above the $60 per barrel level .

Furthermore, we now officially know OPEC produced 31 million bpd in May, with various industry surveys pointing to an even higher figure. In fact, the organization's Secretary General Abdallah Salem El-Badri, formally downgraded the often flouted OPEC quota to a mere ‘recommendation' which few members appear in the mood to take heed of.

However, as OPEC settles downs to observe how the second half of the trading year plays out, harboring hopes that risk of a dip to $40 has receded – trouble could arise from within its ranks. The producers' collective claiming to be adept at coping with US shale oil production is more than likely to see another headache in the shape of fellow member Iran.

Here on Forbes , I have flagged up many false dawns we have had when it comes to a lasting, meaningful nuclear settlement with Iran . While it remains a big if, should Iran and world powers meet the 30 June deadline for finalizing a pact on curbing Tehran's nuclear program, that the Islamic Republic would try to sell more oil is blindingly obvious. How much oil will be loaded, and how will OPEC react is not at all clear cut.

Starting with the former question, Iranians sounded fairly pragmatic, albeit clear, about their forward planning during OPEC deliberations and the media circus that customarily accompanies such proceedings.

Iranian oil minister Bijan Zanganeh said his country's priority was putting an additional 1 million bpd on to the market within months of the sanctions being lifted .

“Within a month, we hope to add 500,000 bpd, raising it to 1 million bpd within six or seven months,” he said. I remain skeptical of the figure; oil production is not simply a case of turning more taps on at will. Logistics, insurance and buyers' adapting their refineries to take on more Iranian crude are also factors that cannot be resolved in the stated time frame.

To contextualize, Zanganeh's projected figure would mean raising Iran's headline oil production by over 25% within six or seven months, with the country currently producing just shy of 3 million bpd since sanctions began to bite.

While skepticism about physical volumes that might start tricking from Iran is valid, there is no doubt the oil is indeed coming to the market. Zanganeh's stated target could well be achieved within 18 months, if not six and Tehran is cognizant of Asian appetite for crude oil .

Furthermore, even if the nuclear agreement on 30 June is a lukewarm one, barring a total collapse in negotiations, buyers such as China and India are standing at the ready to welcome Iranian crude on favorable terms.

 

However, with the surplus oil that's already there in the global supply pool, whatever quantity of Iranian oil hits the market, an impact would be felt by Asian markets first. As that is also where bulk of OPEC global market share of 31% comes from, turf and price wars are all but guaranteed.

Most senior Arab delegates I spoke to at OPEC expressed anxiousness about Iranians “losing control and flooding the market”. Iranians smirk at such a chain of thought, for it would be a bit rich for Arab members to urge Tehran to pump in moderation when its capacity to produce more is on song.

In any case, discipline has not been OPEC members' strong point, as the last few years have illustrated. Just about everyone from heavyweight Saudi Arabia downwards is flouting restrictions. With individual quotas no longer published by OPEC, it is difficult to say by how much.

Hence, Zanganeh noted: “If OPEC members want to keep prices at the same level, we expect them to make room for Iranian oil. We will improve our production to pre-sanctions level, but will coordinate with fellow OPEC members so that it does not have a negative impact.”

As a supply-side analyst, I wonder what shape that coordination would take short of insisting others produce less oil to accommodate Tehran's needs or vice versa. Recent history and regional geopolitics point to Iran not being particularly good at listening to the outside world in general and Arabian nations in particular.

If positions get entrenched as expected, even as little as 200,000 bpd in additional Iranian oil would prevent Brent from escaping the $50-75 price bracket , pushing it more towards the lower end of the range. OPEC's only hope is that phased increments in Iranian exports would be accompanied by a rise in non-OECD demand, alongside China and India's need to stock up strategic reserves which anecdotal evidence is increasingly pointing to.

With Iraq talking of increasing its production, and clear evidence of Nigerian and Angolan cargoes destined for the US being diverted to emerging markets, the battle for market share is not only being fought between OPEC and non-OPEC exporters, but also within OPEC.

Given that shale oil, especially Eagle Ford production , has become an animal OPEC is struggling to understand, a beast from within its ranks in the shape of Iran might soon rough up the landscape even more.

 

Gaurav Sharma, a Forbes contributor, UK-based financial writer and oil & gas sector analyst with over 15 years of experience in the financial and trade press (@The_Oilholic). Petroleumworld does not necessarily share these views.

Editor's Note: This commentary was published by Forbes, on June 12, 2015. Petroleumworld reprint this article in the interest of our readers.

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