OPEC’s internal tensions rise as producers like Iran, Iraq and Libya, after years of production below capacity, look to increase output. Still, those increases will not come online for some time, and Saudi Arabia remains the de facto group leader, keeping oil prices stable.
Oil markets have had a lot to wonder about lately. Following the interim deal between Iran and the P5+1 at the end of November, anticipation grew that this could lead to a reduction of sanctions on Iranian oil and a possible increase in supply. Then, at the OPEC meeting at the beginning of December, a placid surface masked growing tensions between the unofficial leader of the group, Saudi Arabia, and other countries looking to increase production. Most recently, speculation has grown that Saudi Arabia is increasingly unwilling to act as the sole swing producer keeping supplies stable.
The real impact of these developments on oil markets is mixed. First of all, it is questionable just how much Iran will in fact increase production over the short to medium term. Before sanctions were imposed, Iran was exporting about 2m barrels of oil a day. Currently they are at about 1m b/d. Recovering to previous levels will be costly. Fields are dilapidated and significant investment will be required to bring them back online. This will likely take some time to materialize.
It is also certain that no changes to the current sanction regime will happen for at least 6 months, until the interim deal expires. The current US and EU oil sanctions remain firmly in place, so without significant increases in demand from non-sanction countries, exports are unlikely to see strong growth. The Energy Information Agency does not anticipate such an increase in the short term.
Still, it does seem that Iran is looking towards a post-sanction oil environment. Iran’s oil minister, Bijan Namdar Zanganeh, recently met with several Western oil groups, including the Italian Eni, the Austrian OMV, and Royal Dutch Shell. The government is also considering changing the current buyback contract system, which is extremely unpopular with foreign oil companies.
The budget recently presented by President Rouhani does not anticipate a significant increase in foreign exchange reserves, so it seems that the Iranians are themselves aware that any changes are unlikely to happen rapidly. But should production increases be realized over the medium to long term, this definitely has the potential to create a glut in the market.
Zanganeh alluded as much at the recent OPEC meeting in Vienna. His comments that Iran would continue to raise output even if prices collapse to $20 a barrel are hyperbole. Still, they reveal the tensions that exist within OPEC. These tensions may prove more important than the possibility of an increase in Iranian supply.
On the surface, not much changed after the meeting. Delegates rolled forward the agreement to hold output at 30m b/d for the 12 members. But serious concerns were raised about individual production levels over the short to medium term, and Saudi Arabia is coming under increasing pressure to roll back output to make room for others.
In addition to Iran’s potential future increases, Iraq and Libya are also trying to stake a claim to more market share. All three have suffered prolonged production issues, and their reduced output has been taken up by Saudi Arabia, Kuwait, and the UAE. Their current aggressive language is being taken by some as an attempt to lay the ground for future discussions on output and perhaps stake a claim against Saudi Arabia’s de facto leadership.
It is true that Saudi Arabia has produced at near record levels of around 10m b/d as production from the other members has faltered. But recent revelations indicate that the kingdom may be unwilling to significantly cut back production to keep supply levels stable.
The implications of Saudi Arabia’s reneging on its role as a swing producer have to be considered within the wider supply situation. Though, like Iran, Iraq and Libya are clamouring for greater market share, like Iran they also may not be in a position to actually increase production. Iraq faces severe security risks and infrastructure bottlenecks, and Libya’s oil exports remain constrained by militia presence and strikes.
It seems that the market recognizes that the bark might be worse than the bite. Over the past month Brent crude prices have stayed around $110, and have not come close to dropping below three digits. What may prove to be more important will be accommodating the rapid increase in US shale production, and dealing with muted demand due to slow global economic growth.
Still, it may be worthwhile for the group to begin considering how it might discipline production over the next year or so, should production challenges in Iran, Iraq, and Libya be overcome. Individual country targets have not been used since 2007, but reinstating them seems a likely option. And Iraq is currently exempt from group targets, so they should perhaps be brought back into the fold. Nothing major looks to change in the short term due to these recent developments, but over the medium to long term OPEC may be facing some serious challenges.
