Tag Archives: Iran

OPEC Deal: Problems for Before and After – 11/21/16

Even if a deal between OPEC members is reached, increased supply from Iraq and Iran threatens Saudi Arabia’s control over the group. Iran and Iraq both asked for exemptions from any cuts in the deal citing a need to recover from sanctions and a need to fight the Islamic State respectively.

Iraq and Iran have raised oil output to record highs. Together they produce more than 8 million barrels of oil a day, almost a quarter of the oil pumped by the group and nearly as much as Saudi Arabia, the group’s largest producer.screenshot-2016-11-25-at-7-19-54-pm

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The decision of whether or not to allow the exemptions was ultimately delayed to the meeting on Nov. 30, where OPEC ministers will work out a shared cut in production aimed at reversing a price slide that has devastated the budgets of oil-dependent nations like those in OPEC. Benchmark Brent crude fell from more than $115 a barrel in mid-2014 to less than $30 before rebounding to a still low $45-$50 range.

Both Iran and Iraq would benefit from the higher prices, but they benefit more if they were able to sell more oil while others cut back. While a special exemption might be necessary to make the deal work, it would leave Saudi Arabia to shoulder most of a collective decrease and sacrifice its market share for the sake of its two biggest OPEC competitors.

If there’s no agreement to restrict output, the International Energy Agency has said that oil prices are likely to fall in 2017. OPEC’s own estimates of supply and demand also show that even following through on the agreement would barely drain a record oil surplus without the cooperation of non-members like Russia.

No non-OPEC nations are likely to make substantial cuts to their output. Russia is producing at a post-Soviet era high and has repeatedly said it “prefers” a freeze to a cut. And participation from other major producers like the U.S. or Canada has never been realistic. The U.S., the only oil producer on par with Russia and Saudi Arabia for total output, in particular could cause trouble for the deal. It was the massive increase in U.S. shale oil production combined with lackluster global demand for oil that caused the glut in the first place. Should oil prices rise as intended, revitalized shale driller output will likely put a ceiling on how high they can actually go.

The OPEC Deal: A Last Gasp of Relevance? – 10/31/16

OPEC may have pushed oil prices above $50 with promises of their first production cut in eight years, but doubts remain about how effective a deal could actually be. Between bulging inventories, internal tensions, and a loss of market share relative to non-OPEC producers, even the largest cuts promised in the range put forth in September look relatively minor, as well as unlikely.

Still, OPEC members have been too shaken up by the price collapse for the group to take no action. And should the group have a repeat of Doha, where the talks collapsed over Iran’s part or lack-thereof in the cuts, the costs to the already battered economies of OPEC could be massive. Failure to finalize the deal could mean a return to prices in the low-$40s, according to Goldman Sachs Group Inc.

Of course, if OPEC does manage to implement the maximum cuts, then they would still need to wait for the record surplus to fall off.

The bloc’s own data show that, under the cuts, the excess held in stockpiles would fall just 11% next year. Should competitors — chiefly Russia and the U.S. — decide to increase production and take advantage of the situation to gain a higher market share, the deal could easily fall apart. Any deal not involving at least Russia would have a superficial impact.

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If OPEC reduces output by 900,000 barrels a day from September levels as agreed in Algiers, inventories would contract as a result; however, even within OPEC, countries are probably going to miss that target. Four OPEC countries claiming exemption from the deal — Libya, Nigeria, Iraq, and Iran — increased output by 450,000 barrels in October alone, according to a Bloomberg News survey of available data. Any increased output from those members would have to be matched by grudging cuts by other. Most extra cuts would probably be coming from Saudi Arabia which faces its own economic troubles and reluctance to sacrifice market share for the sake of a losing battle.

Cutting output by enough to achieve OPEC’s objective also hinges on non-OPEC producers, especially Russia, playing their part. Yet Russian officials have said at most refrain the nation would refrain from further increases, according to Interfax, and Russia has had mixed history when it comes to following through with agreements with OPEC.

Representatives from other major oil countries such as Brazil, Kazakhstan, and Oman are also hesitating to accept or outright denying any responsibility to cut their oil output. Officials from Oman have said the nation is willing to cut production as part of deal, but is waiting for OPEC to reach an internal agreement before deciding on its own cuts. Meanwhile, Brazil has publicly committed itself to boosting output by 290,000 barrels a day next year, the biggest increase of any non-OPEC nation, according to the IEA. Kazakhstan also plans to boost output next year following the restart this month of its Kashagan oil field after 16 years of development.

Should OPEC implement its deal, it will almost certainly mean some increase in oil prices. How much some means will depend heavily on how much stock investors put in the group’s ability to affect markets as it used to. As U.S. shale drillers return, threats to oil demand come in new and old forms, and so many more factors outside of OPEC’s control threaten its relevance, it’s hard to say how much longer markets will focus so intently on what the group does.

Iran and the OPEC Deal – 10/14/16

In oil news, few events stir up more volatility than OPEC deal talks so the next few articles will be taking a look at the effects of such talks on some major stakeholders in the oil industry. This series will start with Iran.

Iran has essentially won an exemption from the production controls most other countries agreed to at the recent OPEC meeting. The nation will continue to increase its oil output after successfully arguing that it should be allowed to return production to levels achieved before US-led sanctions devastated its energy industry.

Although OPEC agreed on a new overall range for production and will set up a committee to decide on output quotas for individual members, the probability of a cap on Iran’s production is insignificant for a reason. Iranian officials have repeatedly said they will up production to regain the nation’s pre-sanctions share of the market. Relative to other OPEC members, Iran has little to lose by boosting production and undermining the price support. If anything, Iran welcomes the opportunity to win back some market share.

Iranian officials are seeking to increase output to about 4 million barrels of crude a day. Iran produced 3.62 million barrels a day in August, according to data compiled by Bloomberg.

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Yet, the country’s withered energy infrastructure and investment base will make the official goal difficult to reach. Without a larger influx of foreign capital and technology, something that could take years to happen in earnest, Iran is not recover this year.

Iran has begun the process of attracting foreign investors. National Iranian Oil Co. agreed to the framework of a $2.2 billion deal with Persia Oil & Gas Industry Development Co. aimed at increasing crude oil exports. Moderate forces in Iran, which need to show that easing tensions with the West is paying off, will continue pushing such agreements as they seek higher oil revenues. The oilfield development accord combined with rising crude exports suggests a positive trend for Iran’s oil industry.

Of course, a positive for Iran is often a negative for its regional rival, Saudi Arabia. Because Saudi Arabia is the largest producer in OPEC it is expected to make up for make cuts where others cannot or will not to keep overall production within the range the group agreed upon. Meeting that expectation means conceding market share.

Adding to the deal’s troubles are few other issues: Nigeria has also claimed exemption from any cap on its output as it recovers from militant attacks on its oil assets, Iraq has said it doesn’t accept OPEC’s estimates of its production levels, Libyan output is rising substantially, and Russia, with its history of not following through on similar deals, boosted output last month to a post-Soviet record. None of those issues will help the deal but, like Iran, those countries may be expecting Saudi Arabia to pick up the slack anyway.

OPEC Inaction Analysis – Politics and Misc – 5/18/16

The reasons behind the Saudi Arabia keeping OPEC policy aimed at minimal market interference are not all economic. Recently removed oil minister, Mr. al-Naimi set a policy of seperation between politics and oil. Such a policy deeply conflicts with the vision of Crown Prince Mohammed bin Salman, now seen as the power behind the Saudi throne. The Prince appears much more open to using oil policy as a tool in conflicts with regional rival Iran as he reportedly made a last minute call to Saudi officials in Doha that ultimately scuttled the expected freeze agreement. His demand that any agreement on a production freeze include a similar commitment from Iran, which it openly opposed from the outset as it is trying to recover from recently lifted sanctions, illustrates his confrontational nature when it comes to the rival nation and willingness to use oil policy for political ends. Such actions only increase internal discord and inaction by OPEC as a whole.

Saudi Arabia and Iran’s adversarial relationship in the marketplace and in regional proxy battles contributes greatly to OPEC inaction. The two largest producers of the group, neither feels obligated to comply with obviously self-serving demands of the other, so Iran is likely to continue its drive to increase oil exports. The newly released IEA Oil Market Report  (OMR), showed a 300,000 barrel a day jump in Iranian oil output in April, while Saudi output remains steady near 10.2 mb/d. The two countries compete for market share in Europe and Asia, and both are in need of cash to fund their competition for influence over neighboring regions in the Middle East.

Still, the global oil surplus in the first half of this year will probably be smaller than previously estimated because of robust demand in India and other emerging nations, according to the IEA. Although a rebound to prices above $50 a barrel is unlikely since stockpiles are full to bursting with crude oil and refined products, the global supply surplus of oil is expected to fall substantially by the end of the year. The report also had OPEC reaching its highest output since 2008 as Iran increased production.

An end to the glut would validate the OPEC/Saudi Arabia policy of letting market forces re-balance world markets, a move pushed by the Saudi Crown Prince who pressed his country’s oil ministry to back out of a freeze deal at Doha and who publicly plans for his country to move beyond oil.

OPEC itself has kept forecasts for global oil supply and demand unchanged before members meet to review the market. Oil prices are up 75% from February lows as U.S. shale driller bankruptcies have increased, making it unlikely that the group will change tactics. OPEC members have announced no plans ahead of the June 2 meeting so the group is likely to continue with its strategy of inaction.

“We shouldn’t expect any freeze and definitely not any cut because OPEC sees things are improving from a fundamental point of view,” said Torbjoern Kjus, an analyst at DNB ASA in Oslo. “The structural decline based on lower investment is starting to show up in numbers for non-OPEC. That damage is done, even if prices recover in the second half.”