Beware The Iranian Oil Mirage

Also on in the commodities analysis section

Investors are jittery at the prospect of Iran suddenly adding millions of barrels of oil to an oversupplied market if sanctions are lifted. This, according to many, is the primary cause of Monday’s oil selloff. Iran is projecting oil strength in advance of a possible deal in the nuclear talks and the possibility that all sanctions will be lifted. However, Iran is not trustworthy and information that comes out of government ministries is not reliable. Iran’s goal here is to portray power.

Much noise has been made recently about 40 million barrels of oil sitting in floating terminals that Iran would release as soon as the ink on a nuclear deal is dry. As a result, prices are expected to drop between $5 and $15 per barrel. But a Citigroup report indicates that at least 2/3 of that oil is condensates or a condensate/crude mix – undesirable in most markets. Iran would have to sell this oil at a significant discount.

Actual estimates of Iran’s productive capacity raise doubts about Iran’s ability to truly exacerbate the oil glut. It doesn’t help that the unrealistic predictions pushing crude prices down are being fed by Iranian oil minister Bijan Namdar Zanganeh. He claims that as soon as sanctions are lifted Iran’s oil production will grow by 1 million barrels a day within 6 months. Though analysts have limited information, their projections are generally far more conservative than the regime’s.

Even the most generous appraisals, like that from the Center for New American Security, cut Zanganeh’s estimates to 800,000 barrels per day in 6 months.

The EIA thinks that Iran could export about 700,000 barrels per day, but not until the end of 2016. And 600,000 barrels of the expected amount would be stored crude with just 100,000 barrels of new production.

Iranian-born economist Bijan Khajehpour, of the Vienna-based management consulting firm Atieh International, does not believe Iran could increase production nearly that fast. He thinks Iran will immediately put 400,000 barrels a day into the market – mostly from storage. Though he does believe that with some infrastructure and marketing investment, Iran could sell up to 2.5 million barrels a day as soon as 2017. Still, this calculation is predicated on Iran regaining its pre-2012 contracts with the same refineries that are still set up to process heavy crude like Iran’s. But Iran is not the only supplier of heavy crude – Saudi Arabia, for example, ships heavy crude to refineries around the world – including to the largest refinery in the United States, Motiva.

Recent media estimates have scaled Iranian production back to only 300,000 barrels a day within 4 months of lifting sanctions.

The analyst consensus suggests that Iran is seriously overinflating its capacity to produce oil, which is adding fuel to the speculation fire that has kept oil prices volatile and dropping. The Iranian economy, struggling even under the current relaxed sanctions, needs lower oil prices like a hole in the head. So why is Iran presenting the idea that its oil will flood the market if that will only drop prices?

The answer is: for the optics. Iran’s government seeks to project power it does not have to secure its place in its region, its standing in international negotiations, and its strength over its own people.

The false projection of power is common among autocratic Middle-Eastern rulers. Iran’s one time neighbor, Saddam Hussein, met his end because he continued to falsely project the optics that he had caches of weapons of mass destruction. He gambled that the image of power was more important. He lost.

A different Iranian regime, in 1951, did something very similar. At that time Iran’s Majlis (parliament) nationalized its oil industry out from under British Petroleum. But after forcing out the British it turned out that the government lacked the know-how to run its own oil industry and was hamstrung by a British blockade that prevented Iran from moving any oil. Soon, it became clear that Iran had projected power beyond its strength and the government could not operate as promised. Finally, in 1954, after the government collapsed in a British and American-backed coup, Iranian oil returned to the market after a consortium of international companies was formed to purchase the oil.

Iran’s autocratic leaders continue to present the illusion that they have the ability to impact the world’s oil supply tomorrow and in the long-term, because that creates power in the absence of true strength. Even if it turns out that those tankers are filled with 40 million barrels of sea water, the idea they represent has become a powerful image.

In the short-term, that image has already prevailed and speculators are acting on it. In the long-term, however, the numbers – not Iran’s claims – will prove whether or not Iran actually has that power and can significantly impact the global oil market.