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Iran Set to Increase Crude Oil Production and Flood World Markets

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Iran’s crude oil sanctions lifted

Iran’s crude oil sanctions had been in place since late 2011. They limited Iran’s ability to sell its crude oil on the global markets. Iran’s crude oil production had been almost stable throughout the sanction period, with a slight increase in production levels from late 2013. Iran’s crude oil production is unchanged from the past three years, and it stood at 2.8 MMbpd in 2015. It accounts for 9% of OPEC’s total crude oil production.

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In EIA’s January “Short-Term Energy Outlook” (STEO) forecast that Iran’s crude oil production will average 3.1 MMbpd in 2016 and 3.6 MMbpd in 2017. The increase in production levels should result from the recent removal of Western sanctions. The EIA also estimated that Iran will account for 10% of OPEC’s projected total production in 2016.

Where does Iran’s crude oil production growth come from?

Most of Iran’s crude oil production growth should come from its existing capacity, which has been shut down for quite a long time due to the sanctions. Now that the sanctions have lifted, production should get back on track. Iran is also developing a new oilfield with Chinese companies, which is estimated to add 1 MMbpd to 2 MMbpd by 2017.

Iran’s domestic crude oil consumption growth is expected to remain flat over the next two to three years. The increase in crude oil production levels should go to the global crude oil markets. Iran also has 30 million to 50 million barrels of crude in its tankers. Now that export sanctions have lifted, the global crude oil markets are ready to be flooded with Iranian crude oil of around 1 MMbpd in the first quarter of 2016.

The rise in Iran’s crude oil production and exports will add a further supply glut in the global crude oil markets. As a result, crude oil prices will fall, which could decrease profits for the global and domestic giants like Chevron (CVX), Exxon Mobil (XOM), Total (TOT), Petrobras (PBR), EOG Resources (EOG), and Occidental Petroleum (OXY). Occidental Petroleum (OXY) accounts for 3.8% of the Energy Select SPDR ETF (XLE).

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