Reports of Iran/U.S. talks have surfaced repeatedly over the last couple of years, spooking the markets each time it’s suggested that Iran’s oil could return to the market. But Iran’s crude oil does add a mystery element to the oil markets that transcends demand forecasts.
Traders and oil bulls are not the only ones that should be concerned about the possibility that talk of Iran’s oil coming back into the market could send oil prices well below comfort levels. OPEC surely has some level of anxiety over the possibility that Iran’s oil will return to the market and disrupt the group’s influence over the oil markets.
Iran has been exempt from OPEC’s production cuts for years after the group took pity on the sanctioned nation. OPEC reports on Iran’s production monthly in its Monthly Oil Market Report (MOMR), but it is hard to say with any certainty that these figures are accurate.
Iran’s monthly production, as reported by OPEC’s secondary sources, averaged 2.679 million barrels per day (bpd) in May 2023. This is an increase from the 2.544 million bpd that Iran produced in May 2022, according to OPEC data, and up from the average 2.455 million bpd Iran produced in May 2021. It’s an even bigger increase from May 2020, when Iran’s production was less than 2 million bpd at 1.978 million bpd.
These figures are analogous to the frog being unaware it is being slow-boiled. Iran’s production over the last two years is slowly increasing, despite the sanctions on its oil industry—and it’s already becoming a problem for OPEC, which is desperately trying to regain its clout after losing a fair chunk of it to U.S. shale for a few years.
Over the last couple of years, anonymous sources and people “familiar with the matter” have conned eager media into reporting that talks between the United States and Iran on the nuclear deal is nearing an end, and a deal is in sight. Yet a new nuclear deal that would grant Iran permission to resume exports of its crude oil has unsurprisingly failed to materialize. But that hasn’t stopped those reports from creating a stir in the markets each time, often sending prices quickly and sharply downward as the market braces for a potential flood of Iranian oil back into the market.
Even if a deal is struck, a flood of Iranian oil back into the market is unlikely. Iran’s oil is indeed slow-rolling back into the market already. The lifting of sanctions against the country would not instantly trigger a flood of oil back into the market as if Iran has been stockpiling crude oil for years and needs to offload it all at once. Iran is also unlikely to be able to flip some magic oil production switch somewhere and tout de suite produce an extra million barrels of oil per day, reaching more than 3.8 million bpd like the country cranked out back in 2018 before the sanctions hit.
We don’t know that those production figures are entirely accurate, but it’s the best data we’ve got, and it’s only one piece of the Iranian crude oil puzzle. Shipping data tells another story—one that the whole world has been filled in on, yet chooses to forget whenever those people “familiar with the matter” suggest that the return of Iranian oil is imminent and traders need to brace themselves.
Shipping data—often culled by the painstaking efforts of ship tracking companies such as Tanker Trackers—suggests that Iran has been exporting its crude oil all along, despite the sanctions.
Iran has made evading U.S. sanctions its mission over the last few years, eager to maintain its market share and its much-needed oil revenues. Iran blended Iranian refined oil into Iraqi oil for a short stint to evade sanctions, engaged in ship-to-ship transfers, and turned off AIS transponders to hide oil exports from tanker sleuths. But we all know that Iran is indeed exporting its crude oil despite the sanctions.
With Iran already engaged in a fair amount of oil exporting, it’s unlikely that there would be some sudden return of Iranian oil. Instead, it’s Iran’s steadily increasing oil production that poses a significant problem for the oil group that is still tightly holding the reins of the oil market in an attempt to keep barrel prices high enough to support the weight of their member’s budgets.
As evidenced by past production, Iran has the capacity to produce another million bpd. Sure, it won’t come back online all at once, but if history is any indication, it’s coming, no matter how slowly. Should sanctions be lifted, it would hasten Iran’s continued ramp-up. The question then would be, would the group ask Iran to participate in the production cut? Would OPEC really ask the country that was, at one point, producing 2 million bpd less than it was capable of to hold back on its production?
Saudi Arabia has done most of the heavy lifting by itself when it comes to production cuts. Most recently, Saudi Arabia voluntarily agreed to cut yet another million bpd off its production quotas as it tried to stick it to oil speculators who were betting against oil, and in an attempt to bolster prices. The efforts on both accounts were short-lived, and oil prices—with Brent under $75—are less than where they were before Saudi Arabia announced its oil cut. Saudi Arabia, now finding itself in a jam with lowered production and lowered oil prices, has announced that this extra cut will now be extended into August.
Iran’s ramp up, which is already ongoing, runs counter to Saudi Arabia’s agenda, and puts the organization at real risk that other members will need to cut production as Iran ramps up.
By Julianne Geiger for Oilprice.com