Iran Might Still Outwit the Saudis on Oil

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Iran's oil exports are growingmuch more quickly than analysts predicted back in January when sanctions wereeased. If the recovery continues at its recent pace, it could raise aninteresting dilemma at OPEC's next meeting in June.


As Bloomberg reported earlierthis month, Iran exported more than 2 million barrels per day of crude duringthe first half of April -- a figure calculated from tracking ships loading atIranian export terminals. This compares with 1.45 million barrels a day inMarch. Neither figure includes the country's exports of condensate (a type oflight oil recovered from gas fields).


If we add the volume of oilrefined in Iran -- estimated at about 1.6 million barrels per day -- to theexports, we get a total daily crude supply of about 3.6 million barrels. Keepthat number in mind.


When oil producers, led byVenezuela and Russia, began to talk about an output freeze back in February,Iran made it very clear that it wouldn't participate until it restoredproduction to pre-sanctions levels. It put that figure between 4 million and4.2 million barrels per day, although a look back at its official OPEC-suppliedproduction numbers shows it reported daily output at between 3.7 million and3.8 million barrels before fresh sanctions were imposed in 2012.


Bloomberg, and the sixorganizations OPEC used for its "secondary sources" estimate of itsmembers' production, saw Iran's output falling during the first half of 2012 asbuyers went elsewhere before sanctions came into force. The official figuresgiven to OPEC by Iran show production continuing at about 3.7 million barrelsper day throughout 2012 and most of the following year.


The difference probably reflectsIran's unwillingness to admit sanctions were having any impact. It's possible,though, that production didn't fall as steeply as outside observers thought,with the additional oil going into onshore storage tanks (much harder to trackthan oil stored on tankers). Still, Iran doesn't have enough storage capacityto have kept that up for long.


Drawing oil out of onshore tanksmay explain some of the recent boost in exports. JBC Energy, a consultancy,suggests Iran may also be blending condensate into crude exports to raise thequality of the heavier oil it's pumping.


Iran claims it's now producing3.5 million barrels per day, pretty close to the 3.6 million indicated by mycalculation above. This suggests that the restoration of Iran's pre-sanctionsproduction, which analysts said would take a year -- if it could be achieved atall -- has just about been managed within three months.


That could put Saudi Arabia in atricky spot when OPEC meets at the start of June. If Iran were willing to jointhe rest of OPEC in an output freeze, the Saudis would be faced with a choice.Either accept that their terms had been met and agree to freeze their ownproduction just before it would typically start to rise to meet a seasonalsurge in domestic demand; or move the goalposts again.


As I wrote last week, SaudiArabia doesn't want oil prices to rise to a level allowing new high-costprojects before the market's rebalanced, giving it little incentive to supportfurther price rises. That next OPEC meeting might be testing for the kingdom.