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Forget June Plunge; Oil Back on High Octane from Supply Squeeze

Why There's No Chance Of An Iran Oil Production Freeze Now

By Ellen R. Wald, Ph.D.CommoditiesMay 09, 2016 06:57AM ET
www.investing.com/analysis/don%EF%BF%BD%EF%BF%BD%EF%BF%BDt-wait-on-iran-for-an-oil-production-freeze-200128671
Why There's No Chance Of An Iran Oil Production Freeze Now
By Ellen R. Wald, Ph.D.   |  May 09, 2016 06:57AM ET
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News came out last week that perhaps Iran had already improved its oil production to reach a point near its former, pre-sanctions level. This would be a huge boon for Iran.

The numbers say that Iran is producing nearly 4 million bpd and exporting nearly 2.5 bpd. As a result, market watchers are hoping that Iran may now be willing to participate in the previously proposed production freeze that it so publicly rejected just a couple weeks ago. In fact, in March, Iran said that it would not consider participating in an oil production freeze until it reached pre-sanctions levels.

So, does this mean Iran is now willing to play? Not likely.

Even now that it appears Iran has met—or is about to meet—its target, the chances of an oil freeze agreement revival are slim.

First, an oil freeze agreement is still not in Iran’s interests. The agreement previously under negotiation just a few weeks ago would have frozen production at January 2016 levels. Strategically, Iran cannot achieve pre-sanctions levels of oil production only to voluntarily abandon them for production rates far below those its fellow producing countries would be agreeing to.

Likewise, it would not be beneficial for Iran to freeze production at April or May levels, because just as Iran has increased production, so too have Saudi Arabia, Russia, and Iraq. Strategically, Iran must continue to increase its oil production relative to its competitors to truly return to its pre-sanctions oil market situation.

Second, Iran has offered no indication that it wants to entertain a production freeze. Just this week, following a meeting between Iranian President Hassan Rouhani and South Korean President Park Geun-Hye, Iranian Oil Minister Bijan Namdar Zangeneh, specifically stated that Iran intends to increase its oil exports to South Korea from 100,000 barrels per day in April, 2016 to 400,000 barrels per day in May, 2016. While it may be that recent Iranian exports to South Korea have spiked using pre-produced (and stored) oil, Iran will want to produce new oil to meet the demands of the relationship.

Third, a production freeze now would essentially function like a production cap for Iran and negatively impact its attempts to attract foreign investment. Iran already faces serious challenges in attracting the foreign investment it needs to rejuvenate its oil industry, because the Iranian constitution limits the National Iranian Oil Company (NIOC) from offering foreign companies lucrative deals. The NIOC will be hard-pressed to find foreign companies willing to participate under strict production restrictions in an already unfriendly business environment.

Fourth, an agreement to freeze production, even amongst the OPEC and non-OPEC producers who attended the April meeting in Doha, is not enough to really impact the global oil glut. A speculative jump in prices is really all that can be expected. Without the guarantee of higher oil prices, no producer—including Iran—has a real incentive to participate.

Why There's No Chance Of An Iran Oil Production Freeze Now
 

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Why There's No Chance Of An Iran Oil Production Freeze Now

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Comments (10)
Brad Smith
Brad Smith May 11, 2016 8:23AM ET
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Thank you for your excellent insight once again Ellen. There was much skepticism surrounding Iran's ability to reach their pre-sanction production levels stemming from their aging facilities and their inability to quickly finance a restoration effort. I never believed in this skepticism from the start as Iran did receive sizable financial support in the form of unfrozen assets. And here we are now with a flooded oil market. Saudi Arabia seems to have the correct game plan right now as they are holding onto market share while diversifying themselves away from oil.
Ellen R. Wald, Ph.D.
Ellen R. Wald, Ph.D. May 11, 2016 8:23AM ET
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Agreed, however I do foresee significant problems for Iran in terms of financing oil projects in the future. The Iranian constitution forbids foreign ownership of oil and gas assets and contracts in the past have been structured in such a way that they were less than lucrative for foreign companies. Rouhani has been trying to introduce new oil contracts that would offer foreign companies a better return but has not been successful due to political constraints from hardliners. We will have to see how this plays out in Iran, but so far it doesn't look good. Check out this piece for a more detailed explanation. http://www.forbes.com/sites/ellenrwald/2016/04/14/ongoing-fight-between-hardliners-and-reformers-threatens-the-future-of-iranian-oil/#38af71f37ffb
Casey Poole
CaseybPoole May 10, 2016 9:20PM ET
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Nice Read. Im confused as to why CRUDE gained what it did today (05/10/2016) with API report showing they under forecasted as usual. Does that forecast they offer up anything more than a wild guess and did the Wildfire scare have any impact on their forecast for this week? Toss in Cushing, OK level nearing 90% FULL. Really and truly "should" see a big fall in OIL with all this Plus EIA in am. What is the Glut Effect waiting for???
Kuhailan كحيلان
Kuhailan2010 May 10, 2016 12:23PM ET
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I would recommend that Dr.Ellen, the next article to be " The Middle East & the Chaos Theory and how to stole their Oil " and " The future of USA Shale Oil Production " just to be fair. ? Thanks
Kuhailan كحيلان
Kuhailan2010 May 10, 2016 12:07PM ET
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That was part of the Chaos Theory and the Middle East & the Arabian Spring Era that was supported by USA just to stole their Oil, which reflects the USA morality.
Kuhailan كحيلان
Kuhailan2010 May 10, 2016 12:00PM ET
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Therefore, the plan is that any one from opec will cut his Oil production will be absolutely stolen and immediately by the greedy big belly. :)
Kuhailan كحيلان
Kuhailan2010 May 10, 2016 10:55AM ET
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Let me tell the dirty game behind the whole propaganda of Iranian sanction. The American intentionally freezed the Iranian oil production which was about 4 MMBD in the mean time they prepared to introduce their Shale Oil with the same amount and jump the USA oil production to 13.5 MMBD instead of 9.5 MMBD. And now who's the responsible ?? :) Please, stop blaming OPEC or Saudi Arabia.
Cl Chris
Cl Chris May 10, 2016 2:14AM ET
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Excellent article. The irrational rally during Feb.-May was at least to a great extent based on the false pretenses of a production freeze, which was exactly that. False. No one with any insight into the industry believed in such an accord and yet the mere thought instigated a 50% increase in the price, albeit helped by a swayed, manipulative media spin. This seems to come apart now and the price is set to tumble back to $30 or below.
Jon Ben
Jon Ben May 09, 2016 11:09AM ET
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Good article. Once the irrational speculative oil market brakes down maybe we see mid 30"s again.
wilzon lvngren
wilzon lvngren May 09, 2016 9:21AM ET
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Thanks for the article :-)
Kaspars Lusis
Kaspars Lusis May 09, 2016 8:56AM ET
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After latest Saudi statements (they are not going to worry about the price) it is not that important anymore - freeze/nofreeze. To me it seems we are in the era of cheap oil for a long time.
 
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