What’s OPEC Going to Do With Iran’s Million Barrels a Day?

An oil tanker is seen off the port of Bandar Abbas, southern Iran. Photographer: Atta Kenare via Bloomberg

by Anthony Dipaola & Grant Smith (Bloomberg) Just when it looked like OPEC was winning the war with U.S. shale-oil drillers, a new front is opening up within its own ranks.

The Organization of Petroleum Exporting Countries’ summit on June 5 to determine the group’s output will come three weeks before a deadline for a deal on Iran’s nuclear program. The government in Tehran says it can add almost 1 million barrels to daily production within six months of sanctions being lifted.

[contextly_sidebar id=”3Cfy521Kz2rLnWFLvS5aA1CSrzJbuq4X”]That’s a million barrels that OPEC hasn’t had to worry about since it adopted a new strategy in November of favoring market share over propping up prices. The group is already pumping the most oil in more than two years to quash higher-cost producers, and while Iran’s return would add to the pressure on OPEC’s rivals, it will also heighten competition within the group for buyers.

“There’s a lot of jockeying for position going on in OPEC right now,” Ole Hansen, head of commodity strategy at Copenhagen-based Saxo Bank A/S, said by phone. “The Saudis are increasing production and anyone else in OPEC who can is also doing the same. If OPEC’s not willing to cut output to make room for Iran, they have to look for reductions from producers outside the group.”

OPEC will maintain its output target of 30 million barrels a day when it meets in Vienna, according to all but one of 34 analysts and traders surveyed by Bloomberg last month. In reality, the group has been pumping more than that for a year, a sign of its determination not to cede a single barrel of market share to rival producers.

Restoring Share

Iran, once OPEC’s second-biggest producer and now the fifth-largest, fully intends to “restore its lost share of the oil market,” Oil Minister Bijan Namdar Zanganeh said May 6 in Tehran. OPEC must accommodate his country’s increased output, he said in comments reported by the Shana news agency in April.

OPEC’s strategy is working: The number of active U.S. oil drilling rigs has fallen by a record 60 percent to 646; output from American shale formations fell in May for the first time since February 2011; and producers have cut billions of dollars from their spending plans. In contrast, Saudi Arabia, OPEC’s biggest member and the architect of its strategy, is deploying the most rigs in at least two decades and operating with the lowest spare production capacity in about three years.

Nuclear Talks

Iran and six global powers including the U.S., Russia and China seek to finalize by June 30 the terms and details of a nuclear agreement that would curb Iran’s nuclear program in exchange for an easing of sanctions. Discussions are set to resume in Vienna this week. Both sides have said difficult issues cloud the outlook for success.

Increased production from Iran, and its neighbor Iraq, will heighten competition within OPEC for sales to the fastest-growing markets in Asia and test the group’s unity. It also threatens to kill the 40 percent rally in crude prices from a six-year low in January.

Iraq shipping plans signal all-time-high exports this month as the country recovers from decades of war and sanctions. The nation pumped a record 3.87 million barrels a day in May, according to data compiled by Bloomberg.

Iran produced 2.8 million barrels a day of crude last month, compared with as much as 6 million in the 1970s, data compiled by Bloomberg show. A lifting of sanctions that have limited exports would also spur spending on the country’s oil industry, which controls the world’s fourth-largest reserves. Talks with foreign investors have already begun.

Lifting Sanctions

World powers reached an outline accord with Iran in April. If a final agreement is reached, U.S. and European sanctions will probably be phased out rather than lifted at once, meaning additional exports from Iran probably won’t hit markets until next year, according to Societe Generale SA.

The best option for OPEC in the event of Iran’s reinstatement might be to keep pumping and hope the extra supply is absorbed by rising demand, said Mike Wittner, the head of oil market research at Societe Generale in New York.

“If anything, it adds to OPEC’s strategy of let the low-cost producers produce all-out, and let the high-cost producers be the ones to cut spending, drilling and production,” Wittner said by phone May 29.

A slug of Iranian oil could hit the market even before the country raises output. It has about 10 million barrels sitting in storage on ships, Deputy Oil Minister Roknoddin Javadi said in Kuala Lumpur in May.

Saudi Arabia, with a majority Sunni Muslim population, and predominantly Shiite Iran are increasingly at odds in a struggle for regional influence. Iran has stated its support for rebels in Yemen, whom the Saudis oppose, and is backing Iraq’s Shiite-led government.

“The Saudis would probably not make room for them,” Francisco Blanch, Bank of America Corp.’s head of commodities research, said by phone from New York. “There’s not a lot of friendship between those two.”

©2015 Bloomberg News