Iran’s Crude Oil Goes Back On The Market

Iran’s Crude Oil Goes Back On The Market

$OIL, $XOM, $RDS-A

The fate of Crude Oil prices in Y 2016 depends in large part on the production increases of Iran’s oilfields.

All of these oilfield are pumping Crude Oil from under the hills of the Zagros mountain range in western Iran. Since mid-2012 the fields have been producing way below their capacity because of US and European sanctions limiting Iranian oil exports.

But, now that Tehran has reached an accord with the Western powers to resolve the dispute over the nation’s nuclear program, Iranian engineers are working to bring the fields back to full production.

“Immediately after lifting sanctions, it’s our right to return to the level of production we historically had,” Iran Oil Minister Bijan Namdar Zanganeh said in September, weeks before the 1st international Oil conference held in years in Tehran.

The country’s return to the Crude Oil market comes as the world is producing much more than it needs.

According to the International Energy Agency (IEA), global Crude Oil production in 1-H of Y 2015 averaged 95.7-M BPD, while average daily consumption came in at only 93.8-M BPD. The difference of almost 2-M BPD, that is equal to the daily consumption of France. And it has forced traders to turn supertankers into floating storage facilities.

The Iranians had to make such a move when sanctions hit in Y 2012, converting their extensive fleet (the worlds largest) of Crude Oil tankers into giant storage tanks holding about 50-M bbls that have spent much of the past 2 years anchored in the Persian Gulf

More Iranian Crude Oil on the market in Y 2016 extends the supply glut.

The impact will reverberate across the world, hurting Oil-producing countries such as Russia, Saudi Arabia, and Venezuela, as well as entrepreneurial shale Oil companies in North Dakota and Texas, and major Oil companies including ExxonMobil (NYSE:XOM) and Royal Dutch Shell (NYSE:RDS-A).

As traders anticipate the return of Iranian Crude Oil, the futures market is already lowering its expectations for prices next year, with contracts for December 2016 trading at less than 60 bbl.

Mr. Zanganeh said Tehran would increase its production by 1-M BPD within weeks of the end of the sanctions, expected to be lifted sometime during 1-H of Y 2016. The IEA estimates that within 6 months of sanctions ending, Tehran could bring daily production to 3.6-M BPD, or about 800,000 BPD above current production. That would mark Iran’s highest level of Crude Oil output since Y 2011.

Oil-dependent countries have a history of recovering production faster than anticipated after disruptions.

In Y 2003, Venezuela’s state-owned Petróleos de Venezuela was able to lift output by 2-M BPD in just 4 months despite widespread damage to equipment resulting from an attempted coup against President Hugo Chávez.

In Y 2011, after civil war broke out in Libya and the country’s Oil production fell to Zero, the market widely expected it to take 18 months to raise output by 1-M BPD. Production surpassed that mark in less than 6 months.

Whatever Iran is able to produce next year, much of its Crude could end up in Southern Europe, as it aims to regain customers it lost in France, Italy, and Greece. After sanctions forced European countries to stop buying from Iran, Southern Europe turned to Saudi Arabia, Russia, and Iraq as its main suppliers.

Analysts say that to take back market share, Iran will have to offer customers cheaper Crude than the Saudis and Russians.

Unknown is the amount of Crude Oil Iran has in storage, both inland and in supertankers in the Persian Gulf. Estimates range up to 60-M bbl.

The composition of what’s in storage is also unknown: Crude Oil, fuel oil, and condensate (a form of high-quality Crude) are all possible.

Iran has the world’s 4th largest proven reserves of Crude Oil, and the 2nd largest of Nat Gas.

Regardless of the increase, Mr. Zanganeh’s message to the rest of the energy world: “Our only responsibility here is attaining our lost share of the market, not protecting prices.

WTI Crude Oil finished Thursday on NYMEX -2.09% to 45.35

Stay tuned…

HeffX-LTN

Paul Ebeling

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