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Iran has been back in the international oil markets for only four months, but it's already shaping up to be the biggest risk to the oil price this year, says one prominent strategist.
Since sanctions were lifted on the Middle Eastern country in January, Iran has been able to boost exports, wasting little time to ramp up its production. In April, Iranian exports rose by 700,000 barrels a day from pre-sanctions levels, exceeding expectations, according to Helima Croft, chief commodity strategist at RBC Capital Markets.
"Iran came back much faster than expected," she said. "And if it's bigger and stronger consistently, to me that's the most bearish supply story."
Croft said assessing how many barrels of its 700,000 are from new production, would help to determine the degree by which Iran could flood an already oversupplied market.
She estimated that around 200,000 barrels come from floating storage, which means Iran would struggle to sustain the 700,000-barrels-a-day production increase in a couple of months.
"But if they can push consistently beyond the 500,000 print with like 700,000-800,000 in new incremental production that's out of our base case," she said.
The managing director of the National Iranian Oil Co., Rokneddin Javadi, in February said his country was aiming to boost daily oil production to 4.7 million barrels, which would require an increase of 700,000 barrels a day.
If Iran succeeds with reaching and sustaining production at those levels, it could upset the balance of the entire oil market, according to Croft.
RBC expects the market to stabilize in the fourth quarter of the year, but that a ramp up in Iran production could push that balancing point to 2017. Generally, oil analysts-including the International Energy Agency-are optimistic that oil supply from outside the members of the Organization of the Petroleum Exporting Countries will fall this year, while demand is set to gradually pick up. Combined that should mark a turnaround for oil prices in the second half, RBC said.
Crude CLM6, +0.80% and Brent LCON6, +0.48% oil have surged more than 70% since mid-February, hitting 12-year lows of around $26 and $27 a barrel. This has in part happened because of anticipation the market will rebalance and because of a spate of supply outages around the globe, due to political unrest in Libya, a series of attacks on Nigerian oil facilities and raging wildfires in Alberta, Canada.
Such issues, however, are unlikely, to hit Iranian production, according to Croft.
"If you ask what's the likely bear story for the oil market, it's Iran, because it's more a question of geology and below-ground issues," she said.
She cautioned, however, that exactly because of the geological challenges, Iran could struggle to push production significantly higher.
"You can't teach old fields new tricks and two third of the fields are over 70 years old so you need new investment," she said. "We think they are maxed out now. The fact that the Iranians are saying they are willing to cooperate now with OPEC, I think is probably a realization they are at a max."