Crude Economics
Surging Iran, Fading OPEC

Well that didn’t take long. Iran has already made good on its promise to restore its oil production to pre-sanctions levels, months before many outside observers thought might be possible. The FT reports:

Oilfields pumped almost 3.6m barrels a day in April, a level last reached in November 2011 before sanctions over Tehran’s nuclear programme were tightened, said the International Energy Agency. Crude exports surged to 2m b/d in last month, just 200,000 b/d below late 2011 levels. […]

Iran has shipped more crude oil to India, China and other countries it was permitted to sell to under sanctions. It has also re-established relationships with European buyers and secured new sales agreements with big international oil traders such as Vitol and Glencore, as well as energy majors such as Repsol of Spain.

Tehran’s burgeoning output is doing little to raise hopes that OPEC might agree to a production freeze when it convenes in Vienna for its semi-annual meeting next week. The head of Iran’s state-owned oil company put it very bluntly, telling the Iranian media that “[u]nder the present circumstances, the government and the oil ministry have not issued any policy or plan to the National Iranian Oil Company towards halting the increase in the production and exports of oil.” In other words: Iran is going to keep the crude flowing.

This was the central sticking point in negotiations in Doha last month, when the Saudis (led by their 30-year old deputy crown prince and new power broker Mohammed bin Salman) sank a potential freeze deal when it became clear that Iran would not be joining in on the coordinating efforts. It is, of course, going to hamper any similar efforts at the cartel’s impending meeting, and at this point it seems as if Riyadh is no longer interested in playing the role of market-fixer, and is instead content with competing for market share.

But while it has lost the will to purposefully cut output, OPEC has also lost the capability of boosting output in the case of a major supply disruption. The Wall Street Journal reports:

With recent supply outages sending the oil price back up, the cartel has little flexibility to boost production. This year, OPEC’s spare pumping capacity—the amount it can bring online within 30 days and sustain for at least 90—will be at its lowest level since 2008, the U.S. Energy Information Administration estimates. It said OPEC spare capacity will decline more than 22% in the current quarter compared with the previous quarter. […]

The cartel’s ability to boost output rests mainly with its biggest producer, Saudi Arabia, which has historically held nearly all of the group’s spare capacity. Since oil prices began falling in 2014, the Saudi state oil company has cut investments in new production. New production it brought onstream has mostly offset natural declines in other fields, rather than adding much new capacity.

If you’re keeping score at home, OPEC now has neither the consensus to keep prices from dropping too low nor the technical ability to keep them from spiking too high, leading naturally to the question: what kind of cartel is this? That’s going to be at the front of the various ministers attending the meeting in Vienna next week, and it doesn’t have an easy answer. Famed oil historian Daniel Yergin summed it up nicely last month when he declared that “[t]he era of Opec as a decisive force in the world economy is over.” OPEC is looking more obsolete by the day.

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