Baku, Azerbaijan, Apr.13
By Fatih Karimov - Trend:
While Iranian officials say the country is preparing to boost oil production to equal pre-sanctions level as soon as the sanctions are removed, doubts over the country's ability to do so are rising.
World oil markets will not see a significant rise in Iranian supplies for up to five years even if the OPEC member and world powers clinch a final nuclear deal by end-June, Fatih Birol chief economist and future head of International Energy Agency (IEA) said, Reuters reported April 12.
According to a new report, released by Energy International Risk Assessment (EIRA) on April 13, the tentative agreement, resulting from the 18-month marathon of negotiations in Switzerland and signed by Iran and six world powers (P5+1), has raised chances of removing from the global agenda the possibility of Iran joining the nuclear club.
Iran and P5+1 reached a nuclear framework agreement on April 2 that raised hopes for achieving a comprehensive nuclear deal by June 30 and lifting of economic sanctions on Iran, including the restrictive measures against oil export.
EIRA says that despite reasonable reservations about the achieved consensus and whether it will produce the final settlement to be signed and sealed at the fixed date, June 30, there is no denying it is a major diplomatic breakthrough.
Western sanctions have cut Iran's oil exports by more than half to around 1.1 million bpd from a pre-2012 level of 2.5 million bpd, with the loss of oil income making it difficult to invest in new development and pay for the equipment and services needed to keep its production operating smoothly.
According to this report, the cancellation of economic sanctions would allow for an unhindered upgrade of oil exports, the main source of Iran's revenues.
"If taken at face value, lifting the constraints on Iranian oil exports would enhance the Saudi Arabia's original drive to push down prices. On the outset, it did happen: in the first 15 minutes after the news of the deal struck in Lausanne jingled through the wires, Brent crude price fell 4.6% to $54.23."
EIRA report added that it is a known fact that Iran has some 30 million barrels on board supertankers ready to deliver it to the highest bidder.
"In theory, Tehran could add to global oil exports 1 million of crude per day during a month. But what might be the commercial rationale of such a move? Euphoria from escaping the sanctions is counted out. Iran has been vehemently complaining about the low prices established almost arbitrarily by the dominant OPEC member, Saudi Arabia, its archrival and the informal leader of the alliances of the Sunni states now clinched in mortal combat with the Shiite rebels in Yemen. An additional million of crude would enhance the oil glut, tighten the bear hug over the prices, and prolong the shift of power in favour of the consumer nations".
The report estimates that it hardly fits into Iran's long-term interest. For the moment, Iran produces some 2,85 million bpd, exporting one million, predominantly to Asian countries with China as the number one buyer.
The strategic reserve of 30 million barrels, if infused into global supply, would have a limited impact on the markets and, consequently, would not push down prices. Actually, a new trend gains momentum. It was reported on April 6 that demand is picking up in Asia. Saudi Aramco reacted immediately by raising sales prices for the month of May. The markets responded accordingly; Brent climbed 1,6% while WTI went up by 2,3%.
This development is most beneficial for Iran as well since after the introduction of Western sanctions it had re-oriented its oil export flows from Europe to Asia.
According to the report, now the wind would blow into its sails too. It is not something that would please Saudi Arabia since its bearish policy on oil prices was intended to damage Iranian revenues from hydrocarbon exports.
"However, the second victim, or rather the first one, of Riyadh's heavy-handed administration of the oil markets will continue to feel the heat. Saudi's crude will be even cheaper in May than in April for clients in Western Europe (price cut by 20 cents per barrel) and the US (down by 10 cents). Riyadh's two-track policy reveals its secret destination."
Cheap Saudi crude has already taken its toll: since October, the number of operating oil wells in the United States was halved, as reported by AFP.
Saudi Arabia's manipulation with oil prices seems to be bearing fruit suffocating the American marginal shale oil producers, and setting the stage for the return to a tight global market. However, should this happen, that is should the bull's trend take the upper hoofs, it will replenish the coffers of Iran with extra petrodollars to the annoyance and distress of Saudi Arabia. But this is the way the interdependent energy market functions: the more there is of mine, the more there is of yours.
Just like Iranian Foreign Minister Javad Zarif has phrased it: a "win-win outcome", albeit the warring kingdom would have preferred it to be more of the traditional zero sum game.
In any case, Iran set free to re-enter the Western domains of global energy market does not have neither the resources nor the political will to jump at this opportunity.
At least, Iran will not rock the oil markets with extra supplies, although it would be foolish not to capitalize on the revitalized demand in Asia.
The state-owned National Iranian Oil has announced April 6 it was upping forward prices in May for its "black gold" destined for Asian clients. In April, Iranian Light was traded with a 70 cents discount to prices of Oman and Dubai, while in May the spread will be narrowed to 40 cents.
"There are grounds for a conclusion: Iran adjusts fast enough to the new realities. Why? The local managers in charge of the economy, despite the subordination to the spiritual chieftains, must have learned on the job. At least partly, they owe their newly acquired agility to the pressure of the Western sanctions," the report said.
Edited by CN