Return of Iran oil to positively enhance OPEC’s position

RIYADH: A report released by a leading local investment company, says that a key implication of the recent nuclear accord will pave the way for the return of the Iranian oil to the markets.
The return of Iran will positively enhance OPEC’s position without any adverse repercussions on oil prices, it added.
The report from Alistithmar Capital points out that a major implication of the recent nuclear accord with Iran would be the gradual lifting of the sanctions imposed on the country and the return of the Iranian oil to the markets.
Alistithmar Capital, a closed joint stock company, is a subsidiary of The Saudi Investment Bank.
Oil has always been the main contributor to the strength of the Saudi economy with a share of almost 89 percent of the government income, which also interprets the Saudi equity market sensitivity to oil prices, it stated.
In macroeconomic terms, government spending accounts for 26.4 percent of overall GDP spending, causing oil prices to the Saudi equity market correlation coefficient to be as high as 0.5 over the period 2005–2014, according to Bloomberg Agency.
“It is worthwhile noting that, before the return of the Iranian oil to the markets, the size of the Iranian output prior to the international sanctions was 3.6 million barrels. It then declined to 2.5 million barrels and the country lost its share in its key market, i.e. EU market which used to consume approximately 587,000 barrels, and other markets in Asia consuming circa 528 thousand barrels. With the return of the Iranian oil to the markets, Iranian oil production recently aroused to 2.8 million barrels and is picking up at a gradual pace. The return of a producer capable of re-pumping million barrels per annum will certainly be in the best interest of OPEC,” stated the Alistithmar Capital report.
It points out that OPEC countries’ production did not grow over the period 2013–2014 which is mainly attributed to the repercussions of the political unrest in the region, particularly in Iraq and Libya.
Thus, most of the increase in the output came from non-OPEC countries.
The return of Iran shall give a boost to the strength of OPEC in supplying the markets, especially that production by the largest OPEC producer, i.e. Saudi Arabia, reached an all-times high of 10.6 million barrels per day.
Accordingly, Iran’s return shall ease pressure on the Saudi production as well as the production of other countries such as Kuwait and UAE, which also hiked their production capacities, which would adversely affect the life of their oil reserves, if continued at the same current high levels, given the fact that the reserves of the latter two countries (i.e. Kuwait and UAE) being less than that of Iran.
By the end of 2010, the report said that Saudi oil production totaled 8.2 million barrels. Later, it was increased to 9.3 million barrels over the Arab Spring period of political unrest in 2011 which led to sharp drops in output of several countries like Libya by approximately 1 million barrels and Syria and Yemen by 140,000 barrels. OPEC countries, particularly Saudi Arabia, had to compensate for the shortage in global markets supply and the growth in demand by Japan, at that time. All these increases took place before the sanctions on Iran in 2011.
“The question now is about the existing production capabilities of Iran, the erosion ratio that affected its wells and the period it will take to maintain them. According to the Iranian official press releases, Iran can add 500, 000 barrels and we believe that it will initially depend on its current stocks of approximately 40 million barrels. At this stage OPEC’s intentions shall be revealed regarding current prices and whether it will use the Iranian oil to further reduce prices, which will be annoying to the non-OPEC producers, or there will be proportionate distribution among major producing countries, i.e. Saudi Arabia, Kuwait and UAE, as well as the additional quantities resulting from scale up of growth,in favor of Iran.”
In 2012, the sanctions imposed on Iran adversely affected the country’s production of oil of which approximately 2.5 million barrels were exported daily. With 44 percent of the Iranian markets enforcing the sanctions decision, other OPEC countries, mainly Saudi Arabia, Kuwait and the UAE, had to cater for the supply shortages, increase their global market shares and cover output deficits among them.
According to OPEC’s strategy observed recently, which is focused on the coverage of the largest possible number of markets and catering for the growing global demand for oil, the Iranian oil will boost OPEC’s production capabilities and mitigate pressure on major producers. Although this will be at the expense of prices, it appears that the goal is to force high-cost producers out of the market to the benefit of low-cost OPEC countries.
“Therefore, we are of the opinion that the return of Iran will positively enhance OPEC position without any adverse repercussions on oil prices, unless OPEC opts to increase supply and reduce prices further despite the high levels of production by major OPEC producers,” stated the report.