OPEC must adapt to Iran ’s surplus output

OPEC must adapt to Iran ’s surplus output

Baku, Azerbaijan, Aug. 25

By Umid Niayesh - Trend:
Once Iran starts to supply the market with its surplus crude output, OPEC will be forced to adapt itself to protect the price, Parviz Mina, who served as a member of OPEC Long-Term Strategy Committee, told Trend August 25.

Iran which has signed a historic deal with the P5+1(the US, UK, China, Russia, France and Germany) last month is prepared to increase its crude export following removal of sanctions and insists that the Organization of the Petroleum Exporting Countries (OPEC) should open space for its output.

Meanwhile the organization has resisted so far decreasing output despite drooping prices, and Iran has accused some Gulf States of following political objectives through keeping the oil price down.

However, Mina predicts that when Iran starts increasing its output, the OPEC countries will eventually come to their senses and will take new action to cut production in order to protect prices from falling further than what it is today.

He further said that OPEC is still the only organization that can play an effective role in the global crude market.

OPEC actually is the only commodity organization which its leaders-the oil ministers and even the head of the states- regularly meet and its secretariat in Vienna continuously carries out research and analysis of the market and the political situation, in order to make decisions regarding the supplying of demand, Mina underlined.

"So I don't really see that the OPEC is going to lose its position in the world, but it is now facing a situation which is very critical," the expert said, adding if Iran, which so far has been under sanctions, enters into the market, this will naturally affect oil prices.

The Islamic Republic can within the next one year increase its production by some 500,000 to one million barrel per day (mbd) and with a surplus supply which exists in the market today, this additional oil will put new pressure on prices, he explained.

"According to the IEA, the demand for OPEC oil will not be more than 30.1 mbd in 2016, therefore if OPEC keeps its production at the present level of 32 mbd and Iran adds to it, then we will see a new tendency towards reduction of prices."

A look back to reasons behind oil price fall

The expert further touched upon the current situation of the oil market, saying today the global oil market is really characterized by a standoff between OPEC and non-OPEC producers amid excess supply.

"The oil prices in 2014 collapsed because of the fact that there was an imbalance in the oil market principally due to excess supply and the price of oil dropped very sharply as a result."

The reason for this is that the price of more than $100/b since the late 2000 encouraged major investments in the high cost areas and the application of new technology around the world (including US shale production, offshore West Africa, deep waters offshore in Brazil and in onshore and offshore areas in East Africa), he said.

"Another important but often and recognized reason for this surplus oil, is actually the improved performance of many older producing oilfields around the world due to the application of a new technology which is called the enhanced oil recovery (EOR). EOR has actually stopped the decline of production in many major oil producing areas," Mina underlined.

In November 2014, Saudi Arabia actually conducted its fellow OPEC members towards a decision to maintain its 30 mbd production ceiling even as oil prices were haltering down and calls were growing for a reduction in the group's production. This is while OPEC output had already surpassed the ceiling to 32 mbd.

The former OPEC consultant explained that the cartel's top producer Saudi Arabia had the idea that there was no sense for low cost producers like OPEC countries to step back and reduce their production and allow the higher cost producers outside OPEC to benefit from the reduction in the OPEC production.

Since that November decision the ceiling of OPEC has not been maintained at even 30 mbd practically, he said.

"They have already increased their output by two mbd and all countries within OPEC, excepting Saudi Arabia and Iran, have been producing at maximum capacity."

Now OPEC is faced with a decision either to reduce production to maintain prices at a reasonable level or allow the market to eventually decide on that, Mina said. The expert forecasted that the market, which is really deciding the prices at the moment, would reach a point where the reduction in non-OPEC supply will be inevitable.

"Due to the lower oil prices, the high cost production areas (such as shale oil) will reach a level that will not be able to tolerate the decline and go any lower and from that point the price has to be decided by OPEC by balancing its production."

Edited by CN

Follow the author on Twitter: @UmidNiayesh

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