As the power transition in the US administration could alleviate restrictions on Iran鈥檚 oil sanctions, experts predict that the country will prepare for reentry to the global oil market with the intention of recapturing its lost market share.
Global oil markets have been gridlocked since March 2020 with the lowest oil demand since the novel coronavirus (COVID-19) outbreak hit world economies, leading governments to impose strict measures to mitigate the spread of the virus while keeping millions of people at home.
As oil prices reached historic low levels, oil giants had to lower their production quotas to balance supply with diminishing demand. However, Iran, a significant member of OPEC, has been in turmoil over the past three years after US President Donald Trump announced his country鈥檚 withdrawal from the 2015 nuclear agreement in May 2018, and began to reinstate sanctions that had been eased by his predecessor, Barack Obama.
Iran's economy, traditionally dependent on oil exports, has taken the heaviest toll with sanctions, as many countries cut down oil imports from Iran, fearing economic penalties from the US.
However, during his presidential election campaign, the President-elect Joe Biden said the US would rejoin and expand the nuclear deal, formally known as the Joint Comprehensive Plan of Action, if Tehran returns to "strict compliance."
Returning to the deal would be "the best way to achieve some stability in the region," Biden told in an interview in early December 2020, adding that the last thing the US wants in the region is "a buildup of nuclear capability."
Later in December, Iran instructed its oil ministry to prepare for the production and sale of crude oil at full capacity within three months. The country plans to boost its production to 4.5 million barrels per day (bpd) as of March 2021 and also plans to export 2.3 million bpd of this output.
Although no serious challenge is expected for Iran returning to its official quota once sanctions are lifted and oil begins to flow without any major impediment, Fereydoun Barkeshli, a Vienna-based senior oil and gas analyst, told Anadolu Agency that Iran鈥檚 return will be unlike that of other sanctioned countries like Libya or Venezuela.
The plan of the National Iranian Oil Company (NIOC) to recoup its lost market share by March 2021 will not be easy or instant because wells that remained closed for over a year require gas injection and maintenance, Barkeshli, who is also the founder of Vienna Energy Research Group, explained.
鈥淟ibya is already back in the market with 1.3 million barrels a day. Iran and Venezuela can together put around 4.5 million barrels a day. As such, OPEC and non-OPEC need to be very cautious and calculating. I see no way Iran would back off from its right to regain lost market share. That tendency might apply to Venezuela as well,鈥� he said.
According to Barkeshli, even if the abolition of sanctions on Iran oil exports is not 鈥渟o instant and in full pre-sanctions level鈥�, the country will eventually get back to the market.
鈥淭he writing is on the wall, as according to secondary sources, oil exports and new contracts are already exceeding the 2020 average level,鈥� he said.
Norway-based Rystad Energy鈥檚 head of oil markets Bjornar Tonhaugen, however, said although the Iranian government is capable of boosting crude exports in the next three months, the country can only ramp-up sales by utilizing its approximate 60 million barrels of floating storage and not its physical production.鈥嬧嬧嬧嬧嬧嬧�
- Impact of Iranian oil comeback depends on OPEC+ policy
Tonhaugen argued that the impact of Iran鈥檚 move -- the announcement of its intent to export more crude oil, would be neglected by the market until it becomes evident that Iranian cargoes are trading more.
鈥淚f and when in fact the point is reached when US sanctions are lifted and buyers of Iranian crude are not at risk of being sanctioned, the market reaction will initially be negative, as Iran has around 1.6 million barrels per day of production capacity currently shut-in due to lack of sales,鈥� Tonhaugen said.
The more lasting impact on crude prices, he added, would depend on the policy chosen by OPEC+ to allow Iran to regain market share, which could lead to a reduction in other countries鈥� voluntary volumes, and thus increase the group鈥檚 spare capacity buffer instead.
OPEC countries keep a volume of unrealized production that can be brought on within 30 days and sustained for at least 90 days. Called spare capacity, that volume is an indicator of the world oil market's ability to respond to potential crises.
The International Energy Agency (EIA) estimates OPEC will have some 5.02 million bpd of spare production capacity available in March 2021 -- most of which Saudi Arabia holds.
Drawing attention to Iran鈥檚 possible customers in China, India and Europe, he said these countries would choose the US over Iran to avoid sanctions.
-Weak oil demand
According to Barkeshli, the pandemic virtually destroyed demand to the extent that has never been experienced in the 170 years of crude oil history.
鈥淚n 2019, the world consumed 100.3 million barrels of oil a day. This was the highest level of crude oil demand that was recorded in oil history. Most forecasts back in the fourth quarter of 2019 predicted around 0.7 to 1 million barrels a day of additional demand every year. This would mean that crude oil would remain by far a dominant energy source for years to come,鈥� he said.
鈥淲orld oil demand declined to levels seen in 2010. Demand has already started recovery in China and Asia. In fact, China is using more oil today than it used back in 2019. However, demand is still weak in most other industrial countries,鈥� he added.
Barkeshli contends that the international oil market is still fragile due to uncertainties caused by the pandemic and supply far exceeds demand. 鈥淨uotas have to be fully observed. OPEC and non-OPEC are doing fairly well. However, for Iran, regaining its lost market share is vital. The country鈥檚 economy is in dire need of external revenues. Heavyweights need to come up with a solution.鈥�
The Iranian oil expert said currently there is no reference or legally binding clause for members regaining their lost market shares due to factors such as natural calamities, wars, sanctions, or simply a technical breakdown.
-How is OPEC+ handling Iran鈥檚 situation?
Tonhaugen said OPEC has opted in recent history not to put additional burden on member countries that have been exposed to external factors limiting their ability to produce and export, such as sanctions with Iran, sanctions and deep economic crisis in Venezuela and civil unrest in Libya.
Barkeshli explained that during the 1980s, OPEC ministers passed the 鈥淨uota Loan鈥� resolution for member states鈥� production disruptions. According to the legislation, the countries deprived of their production quota for some time would be allowed to loan parts of their official quotas that were not produced to another member or members and were entitled to regain their share when and if they were ready.
鈥淭hese arrangements were often at regional bases, amongst nations close to their borders,鈥� Barkeshli said.
He recalled that the quota loan resolution was not long-lived since the production capacity of producers is a moving target.
鈥淐ountries invest and raise output. Sooner or later, they embark upon exceeding official quotas and building a new baseline for their quotas. Iran is no exception. The country last produced slightly above 4 million barrels back in 2017 when sanctions were lifted and JCPOA was in place," he said.
Bearing in mind that the OPEC+ has to safeguard the interests of all 22 oil producers, Barkesli warned that the international oil market needs huge investments, as all major producers in the Middle East, Russia and Central Asia have old oil fields that have already passed the second half of their production age.
鈥淭he international oil market now needs fresh oil from new fields. In fact, I see no harm if OPEC plus engages herself in a production build-up campaign," he added.
Barkeshli said although the OPEC+ members sometimes complain about the situation and want to leave the group as maybe 鈥渢hey don鈥檛 like the management or sometimes complain that Vienna is boring, at the end of the day, in or outside OPEC, they all have to work together to maintain market stability.鈥�
By Sibel Morrow and Firdevs Yuksel
Anadolu Agency