Iran Gears Up for Return to Oil Market as U.S. Talks Advance

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(Bloomberg) — Iran is preparing to ramp up global oil sales as talks to lift sanctions show signs of progress. But even if a deal is struck, the flow of additional crude into the market may be gradual.

State-controlled National Iranian Oil Co. has been priming oil fields — and customer relationships — so it can increase exports if an accord is clinched, officials said. In the most optimistic estimates, the country could return to pre-sanctions production levels of almost 4 million barrels a day in as little as three months. It could also tap a flotilla’s worth of oil that’s hoarded away in storage.

But there are still many hurdles to overcome before than can happen. Any agreement must fully dismantle the gamut of U.S. barriers on trade, shipping and insurance involving Iranian entities. Even then buyers may still be reluctant, according to Mohammad Ali Khatibi, a former official at NIOC.

“Our return may be a gradual process rather than swift and sudden — it can’t happen overnight,” Khatibi said in an interview. It may be “a protracted process, in part due to the coronavirus pandemic that’s significantly hurt demand.”

The pace of Iran’s comeback may prove critical for the global oil market. While fuel consumption is on the rebound, it remains depressed by lockdowns and new virus outbreaks. Extra Iranian supplies would impose a burden on its counterparts in the OPEC+ alliance, which has toiled for more than a year to clear a lingering supply glut.

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Within Reach

U.S. and Iranian diplomats, currently negotiating via intermediary governments in Vienna, have signaled that an agreement is withing reach.

If successful, they could reactivate the international nuclear deal that Donald Trump withdrew from unilaterally in 2018. That would require Iran to once again accept limits on its atomic activities, in return for the lifting of an array of tough sanctions imposed by the former president.

Tehran has already taken advantage of the less hostile climate heralded by the election of President Joe Biden. It is reviving petroleum sales, sending a flood of Iranian crude to emboldened Chinese buyers. Production has climbed almost 20% this year to 2.4 million barrels a day, the highest in two years, according to data compiled by Bloomberg.

“Even if the sanctions are not removed, depending on their ability to sell oil in the gray market, they will increase their production further,” said Sara Vakhshouri, president of consultancy SVB Energy International LLC in Washington.

Maintaining Wells

Engineers at government-owned NIOC have been rotating crude production between different fields to maintain sufficient reservoir pressure, according to officials at the company, who asked not to be identified when discussing operations. The procedure is crucial for keeping up output levels. Gas injections at older oil fields in the south of the country are playing a similar role, SVB’s Vakhshouri said.

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If there’s a deal with the U.S., the Islamic Republic could increase production to almost 4 million barrels a day in three to six months, according to Iman Nasseri, managing director for the Middle East at consultant FGE, who has decades of experience covering the region including a period working in Iran.

Others expect a slower pace. It would take 12 to 15 months after the lifting of sanctions to increase production to 3.8 million barrels a day, Reza Padidar, head of the energy commission of the Tehran Chamber of Commerce, said in a telephone interview. Some work required to restore capacity at fields, such as removing and servicing blocked bore-hole pumps, can take as long as one month per well, he said.

China Stockpiles

Even before ramping up production, Iran could deliver a surge in oil sales. FGE’s Nasseri estimates that the country has stockpiled about 60 million barrels of crude. About 11 million barrels of that crude, plus another 10 million barrels of a light oil called condensate, is in “bonded storage” in China, where it’s ready to be sold to end users, according to FGE.

NIOC officials say they’ve maintained contacts with customers, who are willing to resume purchases on regular contracts.

An Iranian restart poses complications for the Organization of Petroleum Exporting Countries and its allies. Led by Saudi Arabia, the 23-nation coalition is gradually restoring the oil output it cut last year when the coronavirus crisis battered demand.

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Saudi Energy Minister Prince Abdulaziz bin Salman has signaled that the producer group would make room for Iran to boost output, as it has in the past. It’s unclear whether others in the alliance, which includes countries eager to revive output like Russia and the United Arab Emirates, will be so accommodating. But they may not need to be.

Difficult Talks

With Tehran and Washington still haggling to secure the best terms from the talks, a deal may take much more time. If recent attacks and incidents in the Persian Gulf escalate into open hostilities, it might slip away altogether.

Talks could also be affected by next month’s elections, after which Iranian President Hassan Rouhani is stepping down. While Supreme Leader Ayatollah Ali Khamenei has so far endorsed the negotiations, Rouhani’s successor may take a harder stance against the U.S.

Even if sanctions are removed, Iran faces other problems. Oil refiners probably signed annual contracts at the start of the year, leaving little room for Tehran to strike its own long-term supply agreements for the time being, Khatibi said.

“Our biggest concern is limitations imposed on our customers and their fear of buying oil from Iran,” he said. “As we draw closer to the end of the year, we’ll see more term contracts happen.”

Trump’s sanctions “suffocated” Iran’s relationships with traditional customers including India, China, South Korea, Japan and Turkey to a greater extent than previous rounds of trade restrictions, said Padidar of the Tehran Chamber of Commerce.

For many in the market, from Wall Street banks like JPMorgan Chase & Co. to trading houses such as Vitol Group, oil demand is recovering fast enough to comfortably absorb additional Iranian barrels. As the rapid deployment of vaccines helps end lockdowns, pent-up demand for travel stands to propel consumption higher in the second half.

“There is space for oil from Iran to return,” said Mike Muller, head of oil trading in Asia for Vitol Group, the world’s largest independent trader. “It won’t come back in one big bang.”

©2021 Bloomberg L.P.

Bloomberg.com

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