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The decade-long standoff between the West and Iran over its nuclear programme ended on January 16 after the Islamic republic satisfied the conditions of the International Atomic Energy Agency (IAEA), set by permanent Security Council members plus Germany and ratified by the Security Council itself. Iran has agreed to claw back its nuclear programme substantially and accepted long-term surveillance and certification by the IAEA.
The sanctions imposed by the US and the European Union curtailed Iran's oil exports by more than a million barrels a day (mbd) as exports fell from 2.537-mbd in 2011 to as low as 1.26-mbd. When it became evident that sanctions would be lifted, speculation was rife as to how much oil could Iran produce and when and how would this affect exports, considering that it had accumulated about 46 million barrels stored in tankers.
Iran's statements were very upbeat as Roknoddin Javadi, managing director of the National Iranian Oil Company, told Reuters as far back as May 2015 that exports can come up to pre-sanctions levels within three to six months of lifting the embargo. Petroleum Minister Bijan Zanganeh said Tehran would pump another 500,000 barrels a day within a month of sanctions lifting and up to 1-mbd within six or seven months.
He warned Opec to make room for Iran, which was interpreted as the country willing to sell oil at any price and that other members of Opec, especially Saudi Arabia, will have to cut production to keep the market in balance.
However, most analysts said that several months may be needed to gradually recover Iran's production to pre-sanctions level as the shut fields may need investments and work to rejuvenate them. The average of expectations was that Iran may be able to increase its production by 500,000 barrels a day by end 2016. But Iran could impact the oil market once sanctions are lifted by selling large volumes stored in its idle tanker fleet.
So how has Iran performed now in the near five months since sanctions were lifted?
To start with, I believe that Iran had plenty of time - between July 2015 when the agreement was made and January 2016 when sanctions were finally lifted - to prepare and maintain its fields. Production in December of 2.91-mbd increased close to 3-mbd in January, and from February's 3.125-mbd, the first full month after sanctions were lifted, to 3.56-mbd in April and 3.6-mbd in May as reported by Iran to the Opec Secretariat.
Exports were rising even at a higher rate than production as they increased from 1.4-mbd in February to 2.6-mbd in May. This can only be explained by Iran selling from stocks in floating tankers as well as from fresh production.
However, the rate of increase in production has slowed down and it remains to be seen how much Iran can increase its production further. The IEA is reporting Iran's sustainable crude oil production capacity in May at 3.6-mbd and unless the country is in the process of rejuvenating its oilfields, further increases may be slow to come, if any. Therefore, any increase in Iran's exports is likely to come from stocks or from increased production of condensate.
The expectation that oil prices would decrease if sanctions were lifted and if Opec does not accommodate increased production proved to be a mirage. Opec, and especially Saudi Arabia, was not interested in reducing production since it adopted a policy seeking higher market share in June 2014 and the subsequent fall in prices that followed from $110 a barrel for the Opec reference basket (ORB) of crude oils to $26.50 a barrel in January 2016.
However, Iran and other oil producers should thank their lucky stars as ORB prices kept rising from the lows of January to $43.21 a barrel in May and $46.13 a barrel so far in June. The reasons for this recovery are the production disruptions in Nigeria, Libya, Kuwait and Venezuela in addition to falling non-Opec supplies to the extent that it more than compensated the increase in Iran's or in Opec production as a whole.
By following competitive prices, Iran regained its markets in Europe by exporting to France, Spain and Greece in addition to doing the same in Asia, despite the American banking sanctions that are still in place and the difficulties of not being able to insure its tankers in the international market due to restrictions in making transactions in dollars.
So far, Iran's performance in the last five months is neither as good as official statements promised nor as bad as analysts forecast. It has not affected crude oil prices and now that Iran is almost at its pre-sanctions' production, it remains to be seen whether it will take a more cooperative stance with other oil producers to freeze production and improve prices.
Source: Gulf News