by Dan Lothrop, Northland Energy Trading, LLC
On July 14, 2015, the five permanent members of the United Nations Security Council (China, France, Russia, the United Kingdom and the United States) plus Germany signed the Joint Comprehensive Plan of Action (JCPOA) with Iran, known commonly as the Iran nuclear agreement. The agreement lifted U.S. sanctions against Iran that had been in place since 2010, with the passage of the Comprehensive Iran Sanctions, Accountability, and Divestment Act, in return for a number of measures and monitoring to prevent Iran from developing nuclear weapons. Sanctions from the United Nations related to nuclear weapons development had also been in place since 2006, and the European Union banned the importation of Iranian crude oil and petroleum products in 2012.
According to Thomson Reuters data, monthly Iranian oil production approached 4 million barrels per day (mb/d) in early 2008, but fell to 3.7 mb/d by April of 2011 and then fell sharply, hitting a low of 2.61 mb/d five years ago, in October of 2013. Following the signing of the JCPOA, Iranian oil production recovered sharply, hitting a high of 3.83 mb/d last December and holding near there through April of this year. However, U.S. President Trump announced on May 8, 2018 that the United States was withdrawing from the nuclear agreement, starting the clock for U.S. sanctions against Iran to be reinstated. The first round of sanctions hit on August 7, but the sanctions against Iran’s energy sector were set to take effect on November 4. Even ahead of the implementation of these sanctions — helped by a tougher stance from Washington than in the previous regime, indicating sanctions waivers would be hard to come by if issued at all — countries began reducing imports of Iranian crude oil, and production began to fall sharply.
U.S. Secretary of State Mike Pompeo stated that the “focus is to work with countries importing Iranian crude oil to get imports as low as possible by November 4.” Thomson Reuters data for Asian customers of Iranian crude oil indicate that this effort had been quite successful as of early October. Asia Pacific is a very important market for Iran (and OPEC as a whole). OPEC data show Iranian crude oil exports to Asia and the Pacific accounted for 64% of the total 2017 volume, with the remaining 36% headed to the European market.
Asian buyers initially ramped up Iranian crude oil imports, taking advantage of their availability, with Thomson Reuters data showing some 8.51 million metric tons imported in the month of July. However, imports subsequently fell sharply, falling by nearly 40% to 5.202 million tons by September. That month, South Korean imports were eliminated, and imports by Japan were slashed to 50% of July levels. Even Chinese imports declined, with state refiner Sinopec reportedly cutting imports in half in September.
How far Iranian oil production will fall and how much of an impact that will have on the balance of the oil market remain the big questions. Brent and WTI crude futures prices strengthened significantly in the third quarter as the sanctions loomed, with Brent trading near $85 per barrel (bbl) and WTI at $75/bbl in early October. ULSD futures on NYMEX rallied from $2.1558 per gallon (g) on July 2 to $2.3772/g on October 1. Thomson Reuters data estimated Iranian oil production had already fallen by 370,000 barrels per day to average 3.45 mb/d in September. Ben Luckock, co-head of oil trading at Trafigura, said in late September that consensus for the expected decline in Iranian oil production had increased from 0.3-0.7 mb/d when sanctions were first announced to “well beyond” 1 mb/d or even as high as 1.5 mb/d. This would be consistent with output falling to near or even below 2013 levels.
In early October, Saudi Arabian Energy Minister Khalid al-Falih said Saudi Arabian output had climbed to 10.7 mb/d, up by 0.3 mb/d from the 10.4 mb/d produced in August (OPEC OMR, secondary sources), and Russia said its output increased by 0.15 mb/d in September. The two countries held a series of private meetings in September, and quietly decided to increase production. Iran spoke out against this action, saying that increases were in violation of the OPEC output agreement, and stated they did not have sufficient spare capacity to offset lost Iranian barrels. Fellow OPEC member Nigeria has also expressed doubts about available spare capacity. At the same time, there is also potential for a looser supply-demand balance in the oil market given rapid expected growth in non-OPEC (primarily U.S.) oil production, and downside risks to global oil demand growth given emerging market weakness in the face of deteriorating Sino-U.S. trade relations.