Iran: back in good graces?

Energodigest | 1 September 2022
Oil has lost 20% of its value since June (see Fig. 1), largely on fears of waning demand in response to global recession and further monetary tightening by many regulators, including the Fed with its ‘hawk’ rhetoric. Bearish sentiment has also been fueled by the potential resumption of Western talks with Tehran to resurrect a multinational nuclear deal to limit Iran’s nuclear program in exchange for the lifting of oil trading restrictions and other international sanctions. Progress towards the deal has thrown the spotlight on Iranian barrels, which may soon be flowing into global markets.
Iran has built up a sizable flotilla of cargoes that could hit the market soon: as much as 93 million barrels of Iranian crude and condensate are currently stored on vessels in the Persian Gulf, off Singapore and near China, according to Kpler (see Fig. 2), while Vortexa estimates the holdings at 60 to 70 million barrels.[1] A successful nuclear accord would lead to an additional 500,000 to 1 million barrels per day entering international markets from Iran.[2] Should sanctions be lifted, Iran would still need around a year and a half to reach its full capacity of 4 million barrels per day of crude production versus the current 2.6 million (see Fig. 3).[3] Goldman Sachs analysts are also skeptical about Iran’s early comeback, indicating that its overseas sales are unlikely to begin until 2023. To restore its pre-sanctions market share, Iran will need time to sort out insurance and shipping issues, as well to bring its sales back on track.

Where could Iran sell its oil? In 2017 and 2018, when the Islamic Republic gained a brief respite from sanctions, Europe consumed an average of с. 758,000 barrels and 538,000 barrels a day of Iranian oil, respectively, while Asia took 1.2 million and close to 1 million barrels a day.[4] While for the time being Iranian oil may partly substitute for Russian crude supplies to the West, in the long term Tehran will seek to build strong relations with Asian consumers.

The details of the Iranian deal could become public on 2 September, three days before the next OPEC+ meeting. Last week, the Saudi Energy Minister said that the oil futures market was increasingly disconnected from fundamentals, which may prompt OPEC+ players to tighten production, while the possibility of more Iranian oil coming onto the market would only strengthen their resolve.
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