Negotiations in Lausanne, Switzerland, between Iran and the P5+1 team of the US, its Security Council partners, and Germany over Iran’s nuclear program are moving forward rapidly.
And with the prospect of a deal looming on the very near horizon, the markets and other oil producers, most notably Saudi Arabia, have started to come to terms with the likelihood of additional Iranian oil exports hitting the supply-saturated global crude oil markets and what it means for oil prices.
If a deal is struck, it would be all but certain to lead to higher Iranian oil exports, though not as much as the market may anticipate nor as quickly as Tehran may hope.
*** The Saudi leadership under King Salman bin Abdul Aziz appears to be resigned to the eventuality of a deal with Iran, and Oil Ministry officials are making preparations for a sharp rise in the number of Iranian cargoes reaching the global markets. For all of Riyadh’s anxiety over a deal that will be seen as an even stronger tilt now by the Obama Administration towards the Shia regime of Iran, business is business and Riyadh will hope that technical and market impediments limit the speed of the return to full bore oil exports by Iran. ***
*** Saudi sources indicate the Kingdom would want to seek a staged return of the additional Iranian crude, perhaps only an extra 300,000 barrels per day in 2015 FROM its current exports, and certainly not the full 1 million bpd that Iran will be pushing for in the wake of a successful deal limiting its nuclear ambitions. Additional Iranian barrels as well as the long-term expansion of Iraqi output risks putting fresh pressure on oil prices this year, even if Baghdad is unlikely to make much progress in its upstream expansion in the next twelve months. Saudi policymakers would ideally like to see a freeze on the Iraqi expansion in its productive capacity during the current market downturn. ***
*** So in the near term, the Saudi efforts to keep a flood of new crude from hitting the global markets will be focused on the terms under which the Iran oil sanctions would be lifted if there is a deal in the nuclear talks in Switzerland. Further down the road, the prospects for a broader OPEC output deal with non OPEC producers are fairly slim, and without one, the Saudis are adamant they will protect market share and meet client demands regardless of the price. ***
Iranian Optimism on a Boost to Oil Exports
Iranian negotiators led by Foreign Minister Javad Zarif had been hopeful they could deliver a positive announcement to the Iranian people on sanctions ahead of the self-imposed March 31 deadline, and in time for the beginning of spring tomorrow. With no lost symbolism, tomorrow will also represent the start of the Persian New Year, an opportune time for a thawing, so to speak, on a celebration called Nowruz – which literally translates into “new day.”
While meeting that deadline may now prove to be a tall order, Zarif’s team has nevertheless hinted at the possibility of working through the sacrosanct Nowruz holiday in order to push negotiations across the finish line. That is because for all the threatening letters and saber rattling from hardliners on both sides, the negotiating parties appear now to be a stone’s throw away from a deal (see SGH 3/13/15, “Iran: On the Cusp of a Nuclear Deal”).
From Iran’s perspective, Iran’s Oil Minister Bijan Zanganeh optimistically maintains that Iran can ramp up to one million barrels of additional exports within a year once sanctions are lifted. Iran’s oil exports prior to the oil sanctions were around 2.5 million bpd and have dropped to around 1.3 million bpd at present. So the assumption is that the exports can be rapidly ramped back up to those levels.
That, however, may be more aimed at pleasing a domestic audience than a technical or political reality. Analysts generally believe the more likely increase in Iranian exports within a year of the sanctions being lifted is about half that, or around 500,000 barrels per day.
That is in equal parts largely due to how difficult it will probably be to operationally boost output and find customers for exports so quickly, and perhaps not the least because other oil producers like Saudi Arabia and the other Gulf oil producers will be seeking to stagger the availability of the new Iranian crude output to the world oil markets in the terms to the oil sanctions being lifted.
So Riyadh’s preference is that an Iranian export increment be limited to something closer to 300,000 bpd at most during an initial phase.
Staggered Iranian Exports Likely
But for now, the politics of a deal on the nuclear negotiations may favor an oil export outcome along the lines of the Saudi proposal.
U.S. Treasury Undersecretary for Terrorism and Financial Intelligence Adam Szubin reassured a skeptical House Foreign Affairs Committee Congress earlier today that nuclear-related sanctions relief for Iran would be “staged and commensurate with verifiable steps on Iran’s part.”
And it is almost inconceivable to imagine the West fully conceding this key economic concession to Iran, despite Supreme Leader Ayatollah Ali Khamenei’s insistence all sanctions be immediately lifted as part of any negotiated deal. So it would appear that an immediate lifting of the oil sanctions on Iran may not be forthcoming anyway (see SGH 3/13/15, “Iran: On the Cusp of a Nuclear Deal”).
Near term, then, less Iranian crude will be hitting the markets beginning in the middle of this year if there is a deal in the nuclear talks and the oil sanctions are lifted in a staggered fashion, but on the other hand, in the bigger picture, all discussions in policy circles have now turned to when and by how much, not if, Iranian barrels will return to the global oil markets.
In addition, the Saudis are also said to be seeking some limits on the flow of new Iraqi output reaching the global oil markets under a putative future OPEC agreement. But according to Petroleum Policy Intelligence, a research firm SGH works closely with on oil policy issues and which does extensive analysis on the Iraqi oil sector, that could be pushing on what is for all practical purposes already an open door.
That is because aside from potential upside production in the north of Iraq that is heavily dependent on external factors including the ISIS fight, Turkey relations, and so on, there is no real prospect of a major increase in oil supply from southern Iraq until storage, pumps and water-handling issues are addressed. This is unlikely to happen until the end of the decade.
Global Equilibrium Firming
In the meantime, Saudi sources are encouraged by some signs of firming oil demand. For evidence, they point to the higher demand seen in December and January and argue this may result in the narrowing of the supply overhang for OPEC oil from about 2 million bpd to perhaps 1.2 million bpd.
But faced with the prospect of increasing supplies from Iran, and with limited prospects for any actual cut from OPEC, or more importantly, cooperation from Russia on non-OPEC supplies, the Saudis assert the Kingdom will continue to meet its customers’ needs, whatever they are.
Saudi policy-makers understand that any unilateral OPEC (read GCC) output cut would have a limited price impact in size and duration and would likewise prompt US shale oil producers to switch some supply back on. They expect to be able to maintain current policy if prices continue to be stable around $50-60 through the second quarter of this year when seasonal demand is at its weakest.