Potential impact of Iran oil on global supply

 

Following the lifting of sanctions in January, low oil prices and an oversupplied market increased fears that Iran’s crude exports could swamp the oil market. So three months down the line, where are we now?   

The National Iranian Oil Company (NIOC) declared that it would increase oil production and exports by 500,000 b/d as soon as sanctions were lifted, then raise production levels another 500,000 b/d six months later. 

The impact of sanctions

Iran's crude oil exports stood at 2.2 million b/d (and close to 2.5 million b/d including gas condensate exports) before new US, EU and UN sanctions were implemented in 2010 and 2012. Under sanctions, exports decreased to around 1 million b/d (and between 1.2 and 1.4 million b/d including condensate).

Sanctions levelled in mid-2012 had an immediate impact: the EU, which had been taking a quarter of Iranian crude exports, completely stopped its imports in H2 2012, and other existing buyers were pressured by the US to decrease imports.

Although many eyes are on the oil price, Tehran is more focused on reclaiming lost market share. Previously Iran had strong trade relationships with Europe and Asia, however sanctions meant these export agreements were lost in the case of Europe and  reduced in volume for importers such as India and China. Other producers such as Saudi Arabia, Iraq and Russia stepped in to claim the market share.

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Iran’s oil exports

Iran is largely free to increase its production and exports, following the lifting of most sanctions  16 January 2016. Crude oil sales have been picking up ever since, but not at the pace many expected. A key constraint is the decision of the US to keep its older and primary sanctions in place; US persons or US companies are still prohibited from transactions with Iran.

This has the knock-on effect that European banks remain wary of processing financial transactions with Iran. As a result, companies are cautious of clearing dollar transactions, banks avoid issuing letters of credit and shipping insurers mostly refrain from providing insurance for cargoes although smaller banks are managing to do business and crude oil sales from Iran are reaching Europe.

Iranian crude in storage

Earlier, much was reported around Iran’s stored oil, with fears that the country would flood an already oversupplied market. We estimate that between 40 and 50 million barrels are held in storage, with between two-thirds and  three-quarters actually condensate.

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Three reasons why Iran has stored so much condensate recently:

  1. Five phases of the South Pars gas field, which produces significant amounts of condensate, have started producing in the last 24 months
  2. Iran is building an important condensate refinery, which is close to completion. The Persian Gulf Star condensate refinery, with a capacity of 360,000 b/d constructed in three separate 120 kb/d trains, is due to ramp up operations during Q2 2016. The final train is expected onstream during H1 2017
  3. The main importer of Iranian condensate, Dragon Aromatics, suffered a huge blast at its main chemical plant in China in April 2015, and had to decrease its condensate imports.

As of early April, we forecast Iranian crude oil output (versus tanker liftings) to increase by about 0.5 million b/d year-on-year in 2016. Our forecast takes into account the oil in storage, which would allow Iran to keep exports at the current level for more than half a year without increasing output.

The challenges for the NIOC really begin once it reaches full production capacity, which we forecast at 3.7 million b/d in H2 2017. To go beyond this level, Iran's oil fields will need targeted investment and modern recovery techniques. The NIOC does not have these capabilities at the moment, but aims to bring in foreign companies under its new fiscal regime. Success depends on implementing these Iran Petroleum Contracts.

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