Oil markets are buzzing with chatter about the potential return of Iranian oil to the market. News of renewed U.S.-Iranian talks has sparked industry interest and speculation.
However, for the OPEC+ group, which is already cutting crude oil production to support prices, the potential return of Iranian oil is just one of many challenges they face.
Since 2016, OPEC has been cooperating with 10 non-OPEC countries, including Russia, to manage production. While most OPEC members have been cooperating, Iran, Libya, and Venezuela have been exempt from production targets in recent years.
In the case of Iran, the exemption dates back to 2019 when U.S. sanctions were reimposed, causing a sharp decline in production and exports. Libyan and Venezuelan production has also declined in recent years.
As we wait for any official announcements regarding the potential return of Iranian oil to the market, it is clear that OPEC+ will continue to face multiple challenges in maintaining a stable global oil supply and supporting prices.
The Rise of Iranian Oil Production
Over the past few years, Iran’s oil production has slowly been recovering after a significant drop due to U.S. sanctions in 2018. While production fell by roughly two million barrels a day and hit a bottom point in mid-2020, output has now increased by approximately one million barrels a day. In May, Iran claimed to have produced just over three million barrels a day of crude oil.
Despite the U.S. sanctions in place, Iran has worked with countries such as China to evade them, sometimes leading to allegations that the U.S. was turning a blind eye to concerns about spiking oil prices. Additionally, if Iranian production and export facilities have been maintained over the past five years—a significant question mark—the historical data suggests that Iran could raise output by up to an additional one million barrels a day if sanctions were lifted or if enforcement faltered.
This thought-provoking wrinkle creates pressure for OPEC+ to once again assign a production target to Iran. This tension makes the recent Chinese-brokered restoration of diplomatic relations between Iran and Saudi Arabia even more interesting.
Iranian supply is not the only factor bolstering world oil supplies, as there have been other positive surprises in recent times. With these changes in mind, the future of global oil production is set to be an intriguing one.
The Resilient Global Oil Supply
Despite global challenges and sanctions, the global oil supply has shown remarkable resilience. The Russian supply, in particular, has remained robust, defying the odds of a European Union embargo and a G7 price cap on both crude oil and refined products.
Earlier projections estimated that Russian production would drop by over 1.3 million barrels a day this year due to sanctions. However, that figure has been reduced to just a decline of 0.3 million barrels a day, according to the International Energy Agency. Although it is uncertain whether Russia will follow through on its promises to cut production in response to Western sanctions.
Amidst all this, the U.S. Energy Department has furthered its forecast for domestic supply, predicting a growth of over one million barrels a day this year. This increase will bring U.S. production back to prepandemic levels, despite U.S. shale producers under pressure to limit their investment after experiencing poor returns for over a decade.
Additional sources of growth include Brazil, Mexico, and Guyana, as well as global biofuels. Overall, the IEA now expects non-OPEC production to rise by approximately 1.7 million barrels a day this year.
Surprising supply growth from sanctions-impacted countries
Recent reports suggest that Iran and Russia are not the only countries impacted by sanctions where oil supply has exceeded expectations. Venezuela is also experiencing increased output, with levels rising by almost 0.5 million barrels per day since mid-2020 to currently stand near 0.9 million barrels per day. State-owned PDVSA plans to extend production beyond one million barrels a day in the latter half of this year, however, the industry’s poor state after years of neglect and sanctions may limit the immediate upside.
In light of these developments, OPEC+ has taken measures to cut oil production in order to support market prices. In fact, Saudi Arabia’s concerns over market risks led them to implement additional cuts by one million barrels per day for July, with the possibility of extending the cuts beyond that period if needed.
Despite this, strong demand growth may provide some relief. Experts predict robust demand growth this year, potentially driven by China’s reopening following last year’s zero-Covid shutdowns. Both the International Energy Agency (IEA) and OPEC forecast global demand to rise by around 2.4 million barrels a day this year.
According to the IEA, if the latest OPEC+ production cuts are successful, the oil market could experience a large deficit in the second half of the year, resulting in major inventory withdrawals, and as a consequence, the possibility of significant price increases.
OPEC+ Weighs Its Options
The Organization of the Petroleum Exporting Countries (OPEC) and its allies, collectively known as OPEC+, have been cutting oil production since January 2017 in an effort to balance the market and boost prices. The group has extended the agreement through March 2020, with expectations that it may continue through the end of next year.
But that’s where the “maybe” comes in. The recovery of Chinese demand has been slower and weaker than expected, with the national company CNPC recently lowering its Chinese oil demand forecast. Furthermore, many analysts believe that the risks of a recession in the U.S. and elsewhere are significant—with related downside risks for oil demand.
So maybe OPEC+ is overreacting to supply threats including Iran, and maybe it isn’t. However, from a producer’s perspective, the group’s caution—and Saudi Arabia’s proactive voluntary cuts—would seem appropriate.
And if they’re wrong—well, what producer ever complained about high prices?
