oil production freeze

Don’t Wait on Iran For an Oil Production Freeze

News came out last recently that perhaps Iran has already improved its oil production to reach near its 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. Does this mean Iran is now willing to play?

Not likely. Even now that it appears Iran has 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, and strategically Iran cannot achieve pre-sanctions levels of oil production only to voluntarily abandon them for productions 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.

(also on investing.com)