How the oil market would deal with the return of Iranian exports
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The return of Iran to the global oil market in 2021 was an identifiable risk. Talks in Vienna in early April marked the beginning of a process that could resuscitate the Iran nuclear deal – the JCPOA (Joint Comprehensive Plan of Action) – and pave the way for a full resumption of Iranian crude exports. I talked to Hazel Seftor, Senior Analyst Oil Supply, and Ann-Louise Hittle, Vice President Macro Oils, who analysed what’s on the table and the implications for oil market fundamentals.
First, the economic case for Iran to get oil flowing is compelling. Under the Trump sanctions, exports never ceased completely but fell by over 1 million b/d. That has cost Iran close to US$50 billion of lost revenue in 29 months, equivalent to 6% of annual GDP.
Our analysis, based on a scenario with sanctions lifted during Q2 2021, suggests production could rise by 1 million b/d to just over 3 million b/d by the end of 2021. Volumes could be back to the pre-sanctions level of 3.7 million b/d in about 18 months.
Second, global oil demand is rising strongly, presenting a one-off window for Iran to fit back into the market should sanctions be lifted. Demand has already clawed back 17 million b/d from the lows of April 2020 and continues to strengthen. We estimate there’s another 5 million b/d of growth from Q2 2021 to Q3 2022 as the economic recovery gathers momentum. That will take global demand back to the pre-crisis level of 100 million b/d.
Third, there is little competition among suppliers to meet demand growth this year. This gives OPEC+ a degree of control in managing any return of Iranian exports.
US production is declining year-on-year in 2021 and OPEC+ has leeway to boost its own output as it agreed to do – albeit, moderately – at its 1 April 2021 meeting. By July, OPEC+ will still be sitting on 5.8 million b/d of supply held back from the market. On its own, that’s enough to cover the growth in demand we expect.
OPEC+ strategy since the pandemic caused oil demand to collapse has been three-pronged – to ensure demand recovers, keep the market balanced and support price. The strength of the oil price over the last nine months is testimony to how well it’s worked so far. Absorbing 1 million b/d of Iranian crude this year would add another degree of difficulty, but the timing is optimal for OPEC+.
It’s not the first time the return of Iranian exports to the market has posed a problem for OPEC. The lifting of sanctions five years ago was one of a number of factors that led to the formation of OPEC+. In an historic agreement in December 2016, OPEC+ cut production from the start of 2017, helping to rebalance the market and prices to recover.
Finally, finding a new nuclear deal that’s acceptable to all parties is the biggest hurdle. The US and Iran are willing to talk indirectly but the Biden administration will insist Iran complies in full.
The start of the indirect talks in early April has already triggered responses in the region – an attack on Iran’s Natanz nuclear facility last weekend; and Iran’s prompt announcement of plans to increase the purity of its enriched uranium.
Others with a vested interest in the outcome include Gulf oil-producing countries who are adjusting to a more balanced US approach to diplomacy in the region; ditto Israel; as well as China, Russia and the EU.
But what does all this mean for oil prices? If things move swiftly, enabling Iran to export its oil again, production could increase by 1 million b/d by year-end. We anticipate that could have a downward impact on oil prices of up to $5/bbl on average in H2 2021.