Return of Iran to oil market doesn’t pose any threat to producers

The ongoing JCPOA discussions are being watched by international oil markets closely. 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 will only rejoin JCPOA if US sanctions on its main economic sectors, namely oil and gas, are lifted.

Some of the analysts are worried about the possible negative repercussions of Iranian oil on global oil supply 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 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 conflicts.

Without these players in the market, Saudi Arabia is able to successfully control oil markets. The lifting of Iranian sanctions under JCPOA deal worries Arab producers, US shale, and Russia. These worries can be termed ‘unfounded’.

Some analysts argue that a JCPOA success could destabilize oil and gas markets, increase price volatility, and even see a return of oil gluts. There is a major flaw in this narrative because it is based on the assumption that the sanctions have successfully removed Iranian oil from markets. It is certainly true that Iranian volumes are no longer at historic highs, but looking at volumes reaching markets, Iranian oil is still very visible.

Oil and tanker trackers have been showing again and again that Iranian oil exports are not only very flexible, but also increasingly aggressively. 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 (bpd), up from an average of 150,000 bpd 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 2021 by 6.3%. OPEC report published lately showed that Iran’s crude output had surged by 137,000 bpd. OPEC data also showed that Iran’s average output in 2020 hovered at 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. 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 overall Iran oil export potential of around 2 million bpd, current exports are estimated around one 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 plus strategies and cohesion, another one 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 investors decide to price these events into oil markets. Looking at the current fundamentals, OPEC plus leaders are still the real power players in the oil market.

OPEC becoming subservient to US Shale oil producers

I will prefer to say at the outset that Saudi Arabia has become subservient to the US administration. Zionists, god-fathering Israel, have succeeded in creating the perception ‘Iran is a bigger threat.’ This has helped the US in soliciting arms orders worth US$350 billion.

Now, OPEC-led by Saudi Arabia, is being convinced to allow US Shale oil producers to increase their output under ‘mutual coexistence’. Both the Saudi decisions indicate that its foreign and economic policies have become subservient to the US.

The history of the relationship between OPEC and the US shale oil industry has evolved a great deal since the cartel discovered it (OPEC) has a monstrous rival eating up its market for around five years.

To convince Saudi Arabia to give more space, US bankers providing funds to Shale oil producers came to Vienna and key OPEC members are getting readying visit Texas in a bid to understand whether the two industries can coexist or are poised to embark on another major fight in the near future.

The complete surrender by the Saudi Arabia is evident from the statement of Khalid al-Falih, its Oil Minister, who said, "We have to coexist." One can recall that he pushed through OPEC production cuts in December, reversing Riyadh's previous strategy of pumping as much oil as possible and try to push US Shale oil producers out of business, by keeping oil prices low.

OPEC has already decided to extend a helping hand to US Shale producers, but keeps seeking supplies at a level to hold prices below $60 per barrel.

Some analysts believe that now OPEC realizes supply cuts and higher prices only make it easier for the shale industry to earn higher profit after it found ways of slashing costs.

Iran that has already consented to support Saudi Arabia justifies its decision. "For all OPEC members $55 (per barrel) and a maximum of $60 is the goal at this stage," said Bijan Zanganeh, Iran's oil minister. "This price level is not high enough to encourage too much shale? It seems it is good for both."

Some OPEC members seem keen to show they have shed any prior naivete about shale, making it a key topic during Thursday's meeting after barely mentioning it before. Shale's limitations, including rising service costs, also were discussed.

"We had a discussion on (shale) and how much that has an impact," said Ecuador Oil Minister Carlos Pérez. He expressed helplessness, "But we have no control over what the US does and it's up to them to decide to continue or not?"

"In terms of the threat, we still don't know how much (U.S. shale) will be producing in the near future," Nelson Martinez, Venezuela's oil minister said after the talk.

OPEC meets again in November to reconsider output policy. While most in the group now appear to believe that shale has to be accommodated, there are still those in OPEC who think another fight is around the corner.

"If we get to a point where we feel frustrated by a deliberate action of shale producers to just sabotage the market, OPEC will sit down again and look at what process it is we need to do," said Nigerian Oil Minister Emmanuel Kachikwu.

Freezing oil output is a hoax call

Once again there is an uproar that oil producers want to talk about freezing output. It sound very funny that while the big producers are not willing to curtail their production, they want smaller producers to reduce their output.

It is on record that Saudi Arabia has persistently increased its output, but wants Iran to agree to freeze output without reaching its pre-sanction output level. It is on record that lately Saudi Arabia has been pumping one million barrels daily above its historical average.

On the face value it appears that the rift between two OPEC members, Iran and Saudi Arabia is not a complete fallacy. Saudi Arab is not willing to curtail its output because it is afraid of United States and Russia, which are adamant at causing damage to its desire to become a regional superpower, surpassing Iranian might.

Both United States and Russia are fighting a proxy war with Saudi Arabia in Syria and Yemen. Both the super powers know very well that the only way to cause dent to Saudi lust for wars is by reducing its petrodollar income.

In my humble opinion if Saudi Arabia cuts its production and price goes up by one dollar per barrel, it will not be a major loser. However, this may pave way for the US shale producers to increase their output. But a point must also be kept in mind that the US shale producers have not gone bankrupt and continue to pose a major threat to Saudi Arabia.  

Though, it may sound a little divergence from the topic, I just can’t resist from saying that the Zionists have completely brain washed Saudis who openly say that Iran is a bigger threat as compared to Israel. Having belief in this absurd idea, Saudi Arabia has emerged as the biggest buyer of arms.

I would also say that Saudis have enough petrodollars, if they stopped buying arms. Their animosity with Iran has been a cause of instability in the region but more importantly buying arms has not given it supremacy over its rival.