The Strategist

OPEC-Plus: Sanctions against Iran will not affect oil production

09/24/2018 - 15:25

Following results of the summit in Algeria, participants in the OPEC + agreement, contrary to expectations, did not give the market a clear signal about their readiness to increase production to replace Iranian oil. Its exports may decrease after US sanctions entry into force in early November. Thus, the agreement’s leaders, Saudi Arabia and Russia, have so far paused to see the extent of real reduction in production in Iran. This position contributes to the growth of oil prices. However, the deal’s participants may still soften their position at the meeting in mid-November.

OPEC-Plus: Sanctions against Iran will not affect oil production
At the summit in Algiers, representatives of the countries participating in the oil production cuts (OPEC +) contract, which ended on Sunday, only recommended to adhere to the previous agreements and reach full implementation of the deal. As Alexander Novak, the head of the Ministry of Energy of the Russian Federation, noted, "the market is balanced for today, we are gradually moving towards 100% fulfillment of our obligations".

Yet, the paradox of the situation is that now the agreement (according to August data) is being fulfilled by 129%, that is, the agreement participants produce even less oil than they should. This can be explained by a chronic drop in production in Venezuela, as well as beginning of a decline in production in Iran in anticipation of US sanctions, which will enter into force in early November and prohibit export of oil from the country.

Most analysts expected that at the summit in Algiers OPEC + participants would decide to increase production at the expense of those that can increase it (Saudi Arabia, and to a lesser extent Russia, the United Arab Emirates and Kuwait). However, such a recommendation was not presented, and no figures of a possible increase in production were revealed. Thus, OPEC + participants made concessions to Iran. The country was against any increase in production, since in the current situation this would lead to displacement of its own oil from the market.

The country’s representative in OPEC Hossein Kazempour Ardabili said he was very pleased with interaction with the cartel, noting that so far production in Iran has not declined and in August was at the level of 3.8 million barrels per day. According to OPEC, production fell to 3.58 million barrels per day. At the same time, Mr. Ardabili indicated that position of Tehran has softened, allowing OPEC production to grow: "If there is a drop in production - not only in Iran, but elsewhere - OPEC countries and OPEC (OPEC + members) have to balance the market."

"The full implementation of the deal in question implies an increase in production from the current level, but the question is to what extent Saudi Arabia, as the only country that can quickly provide this growth, considers it necessary," says an analyst at a large Western bank. Saudi Arabia's oil minister Khalid A. Al-Falih stressed on Sunday that he does not see a deficit in oil on the market. On the contrary, he noted, even when the OPEC + deal is over 100%, commercial oil reserves in the world are increasing slightly. "All our customers receive as many barrels of oil as they want, and do not ask for more," he said, adding that the country is ready to offer additional supplies if there is a need for them. At the same time Khalid Al-Falih expressed doubt that this will happen, if there is no "unexpected increase in demand".