Iran gears up to return to oil market as US talks advance
(Bloomberg) – Iran prepares to increase global oil sales as negotiations to lift U.S. sanctions show signs of progress. But even if a deal is made, the flow of additional crude into the market can be gradual.
The state-controlled National Iranian Oil Co. has primed oil fields – and customer relationships – so it can boost exports if a deal is struck, officials said. By the most optimistic estimates, the country could return to pre-sanctions production of nearly 4 million barrels per day in as little as three months. It could also tap into the oil value of a flotilla that is stored.
But there are many obstacles to overcome. Any deal must completely dismantle the range of US barriers to trade, navigation and insurance involving Iranian entities. Even so, buyers may still be reluctant, according to Mohammad Ali Khatibi, a former NIOC official.
“Our return may be a gradual process rather than a quick and sudden – it cannot happen overnight,” Khatibi, also Iran’s former OPEC envoy, said in an interview. This is in part because the coronavirus pandemic has “drastically affected demand,” he said.
The pace of Iran’s return could prove critical to the oil market. As fuel consumption is rebounding as governments distribute vaccines and major economies reopen, it remains depressed by lockdowns and new virus outbreaks. Additional Iranian supplies would place a burden on other members of OPEC +, which has worked hard for more than a year to eliminate a glut that has accumulated as the pandemic spread.
US and Iranian diplomats, currently negotiating through intermediate governments in Vienna, have signaled that a deal is close at hand.
If successful, the negotiations could reactivate a 2015 international nuclear deal from which Donald Trump withdrew the United States three years later. This would force Iran to once again accept limits on its atomic activities, in exchange for the lifting of a series of severe sanctions imposed by the former president.
Tehran has already benefited from a less hostile climate since President Joe Biden came to power in January. It revives oil sales, sending more crude to emboldened Chinese buyers. Iranian production has climbed nearly 20% this year to 2.4 million barrels per day, according to data compiled by Bloomberg, although most of that oil is still used domestically.
“Even if the sanctions are not lifted, depending on their ability to sell oil on the gray market, they will further increase their production,” said Sara Vakhshouri, president of consultancy firm SVB Energy International LLC in Washington.
NIOC engineers rotated crude production between different fields to maintain sufficient pressure in the reservoirs, according to company officials, who asked not to be identified. The procedure is crucial to maintain production levels. Gas injections into former oil fields in the south of the country play a similar role, SVB’s Vakhshouri said.
If there is an agreement with the United States, the Islamic Republic could increase production to nearly 4 million barrels per day in three to six months, according to Iman Nasseri, managing director for the Middle East at consultant FGE , who has decades of experience in the region. and worked in Iran.
Others expect a slower pace. It would take 12 to 15 months after the sanctions were lifted to increase production to 3.8 million barrels per day, said Reza Padidar, head of the Tehran Chamber of Commerce’s energy committee, said in an interview. Some work needed to restore the capacity of fields, such as the removal and maintenance of stuck borehole pumps, can take up to a month per well, he said.
Even before pumping more oil, Iran could increase its sales. FGE’s Nasseri estimates the country has stored around 60 million barrels of crude. About 11 million barrels of that, plus an additional 10 million barrels of a light oil called condensate, are stored in China, where it is ready to be sold to refiners, according to FGE.
NIOC officials say they have maintained contact with customers, who are ready to resume purchasing on regular contracts.
A restart of Iran poses complications for the Organization of the Petroleum Exporting Countries and its allies. Led by Saudi Arabia and Russia, the 23-country coalition is gradually restoring oil production it cut last year when the coronavirus crisis hit demand. Its cautious approach to increasing supplies has helped Brent prices climb 33% this year to nearly $ 69 a barrel.
Saudi Energy Minister Prince Abdulaziz bin Salman has indicated that the alliance will make Iran an opportunity to boost production, as it has done in the past. It is unclear whether others, including countries keen to revive production like Russia and the United Arab Emirates, would also be accommodating. But they may not need to be.
While Tehran and Washington are still struggling to get the best deal, a deal can take much longer. If the recent clashes in the Persian Gulf between US and Iranian ships escalate, they could disappear altogether.
The talks could also be affected by next month’s elections in Iran, after which President Hassan Rouhani resigns. While Supreme Leader Ayatollah Ali Khamenei has so far endorsed the negotiations, Rouhani’s successor could take a tougher stance against the United States.
Even if the sanctions are lifted, Iran faces other problems. Many refiners sign annual contracts at the start of the year, leaving little room for Tehran to make its own long-term supply agreements at this time, Khatibi said.
“Our biggest concern is the limitations placed on our customers and their fear of buying oil from Iran,” he said. “As the end of the year approaches, we’ll see more futures materialize.”
Trump’s sanctions have “stifled” Iran’s relations with traditional customers, including India, China, South Korea, Japan and Turkey, to a greater extent than previous trade restrictions, a said Padidar of the Tehran Chamber of Commerce.
For Wall Street banks like JPMorgan Chase & Co. and trading houses like Vitol Group, the oil market is recovering quickly enough to comfortably absorb additional Iranian barrels. Suppressed travel demand should propel consumption up in the second half of the year.
“There is room for the return of Iranian oil,” said Mike Muller, Asia head of Vitol Group, the world’s largest independent oil trader. “It won’t come back all at once.”
(Updates to fourth paragraph with details on analyst and oil prices.)
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