Will Iranian Oil Hit the Market Before 2016?

Uncategorized

(This article was also published on investing.com).

Iran is aggressively hyping its oil production capacity to the media, but its boasts are questionable at best. The National Iranian Oil Company’s (NIOC) chief of investment, Ali Kardor, bragged to the press at a recent business conference in Geneva that Iran will be putting an additional 500,000 barrels of oil a day on the market by December, 2015. At this rate, Mr. Kador expects Iranian exports to top 1 million barrels per day by mid-2016.

Currently, Iran produces a little under 3 million barrels of oil a day, almost all of which is consumed domestically.

Currently, a small amount is exported to Asian customers.

Is there any chance that Mr. Kador’s ambitious estimates could become a reality?

Not likely.

  • The NIOC’s oil infrastructure has been crippled by Western and U.N. sanctions. It is in desperate need of repair and modernization. Most oil analysts believe Mr. Kador’s ambitious timeline is impossible considering the amount of repair needed.
  • Iran’s fellow OPEC members also consider Mr. Kador’s timeline a fantasy. Other Persian Gulf countries think the spring of 2016 is a much more realistic timeframe to reach the 500,000 barrels/day exporting mark.
  • The sanctions preventing Iran from exporting any more oil than the minimal amount currently permitted are not set to end until 2016, so technically Iran’s projected benchmarks would mean a violation of the sanctions.

Given the evidence against Iran’s claims, why is Iran advertising a product it likely cannot offer?

The NIOC is like a new business or a business that is reopening. It is desperate for revenue and for new contracts. It is likely exaggerating its own readiness to provide a product, because customers (mostly China and Europe) will be much more likely to sign contracts with them if they think the product can be delivered soon. It is very possible that the customers know Iran is exaggerating. Mr. Kador’s announcement is a sales tactic, designed to lure or convince customers to contract with Iran sooner rather than later, even if both sides know Iran will not be able to deliver exactly as promised.

Savvy investors should avoid taking Iran at its word when modeling their projections for oil pricing in the next year.