Will OPEC Freeze Output or Drown in Oil?
While Iran boosts production, The UAE runs out of storage.
This year is likely to be the hardest for the oil and gas industry in at least a decade. The reason is simple - low crude prices. In 2016, oil became even more volatile, sometimes losing or gaining up to 10% of its value in a matter of days. While the price of is hovering around the $30/bbl mark, crude exporting countries are in a lot of pain.
As the global market continues to struggle from oversupply, talks between the world's major exporters about curbing production have intensified. On Tuesday, Saudi Arabia and Russia said they have agreed with Venezuela and Qatar to freeze output at the January level if other big producers do the same. It's a nice idea indeed, but it’s coming up rather late. Current global production levels outstrip demand, meaning world crude inventories will continue to rise even if production remains stable. Nevertheless, this could be a good sign for the market and may help to stabilize the crude price.
Iran, once the second largest crude producer in OPEC, might become a problem for producers. Iran's Petroleum Minister, Bijan Zangeneh, said the country will not give up its share in the international crude oil market. The country is just returning to the global market after the recent lifting of all oil related sanctions by the European Union (EU) and the USA in January. In 2010, Iran was producing 3.8 million barrels a day while in January 2016 the country was pumping 2.86 million barrels a day, Bloomberg News reported. This year alone, Iran plans to boost production by 1 million barrels, a clear sign that it’s looking to regain the market share that was taken by other producers during the period of sanctions.
In January, Iran signed deals with European companies, essentially getting back its old customers, Mediterranean nations like Greece, Italy, Spain and France, that used to buy a significant amount of Iranian crude prior to 2011, when the EU imposed sanctions. The EU had been Iran's second-biggest oil buyer, purchasing nearly 600,000 barrels a day according to the U.S. Energy Information Administration (EIA).
A few new deals were announced at the end of January. First, an agreement was signed by Iran and Greece's main oil refiner Hellenic Petroleum. The volume of oil that Hellenic is set to buy, according to a new contract, has yet to be disclosed. Greece was one of the largest importers of Iranian crude in the EU, buying about 120,000 barrels a day in 2011, according to data from the EIA.
Another agreement was signed during Iranian president Hassan Rouhani's visit to Paris. A contract between the National Iranian Oil Company (NIOC) and French giant Total took effect on February 16. According to Zangeneh, Total will import 160,000 barrels of crude oil per day.
Spanish refiner Compania Espanola de Petroleos and Litasco, Russian Lukoil's trading unit, have also ordered shipments of Iranian crude to Europe. Each company will buy 1 million barrels of oil, Iranian officials said. According to Reuters sources, Iran will be charging all their European clients in Euros, a seemingly political decision to ease the country's dependence on the US dollar.
To provide these additional crude oil volumes, the NIOC has ordered a boost in production by 500,000 barrels per day to commence immediately after the cancellation of the sanctions, according to official Iranian media. The country intends to raise output by another 500,000 barrels per day later this year as new deals with European companies come in. Earlier in February, Zangeneh said that Italy's giant Eni is going to sign contracts for buying Iranian oil and the development of an oilfield. Eni plans to purchase 100,000 barrels per day of crude oil from Iran. Another Italian refiner, Saras, is looking to buy up to 70,000 barrels per day of Iranian crude, Zangeneh added.
Iran has already started to increase exports to Asia. In January, South Korea bought three times more Iranian crude than during the same period last year. Customs data shows that South Korea purchased 203,165 barrels per day of crude from Iran last month comparing to 64,699 barrels per day a year earlier, quoted Reuters. On average, South Korea was purchasing 114,595 barrels per day of oil from Tehran in 2015. Iran is also likely to expand exports to Japan soon. On Monday, Iranian and Japanese officials said the two countries can resume their oil ties at levels before sanctions.
Since a nuclear deal was implemented, Iran has boosted output by 400,000 bpd, an NIOC representative said on Sunday. The country is seeking to expand production by 1 million barrels per day and regain export shares of 2.1-2.3 million barrels per day. Currently Iran exports 1.3 million barrels per day of crude oil, according to the country's Vice President Es'haq Jahangiri. Will Iran freeze its production at January or even February levels? According to previous statements made by officials, it is unlikely. Furthermore, Iran's competitors are unlikely to accept the fact that the country will gain its market share while others would be frozen.
If the world's major producers don't reach an agreement, OPEC's oil output may continue to rise despite the fact that some OPEC members are already drowning in crude. The UAE is seeking to store its oil in India, a clear sign that Abu Dhabi is running out of its own crude oil storage. Last week Indian media reported that Abu Dhabi National Oil Company (ADNOC) plans to use half of Mangalore's new 1.5 million-tonne storage facility, equaling about 6 million barrels. India is now building a new underground crude storage facility with a capacity of approximately 5.33 million tonnes. In exchange, the UAE has offered two-thirds of the oil free to India, meaning if Abu Dhabi plans to stock 0.75 million tonnes, 0.5 million tonnes will belong to India, an Indian official said. ADNOC will start using the facility when tax issues are sorted out.
