Oil Sales Steady As Agreement Rolled-Over

BMI View : Iranian oil exports in the second half of 2014 will remain close to H114 export levels of 1.27-1.30mn barrels per day (b/d), as Tehran and the P5+1 countries agreed on July 18 to a four-month extension in talks on the nuclear programme. 

As expected by BMI, Tehran and the P5+1 countries failed to meet a July 20 deadline for a 'permanent' deal over Iran's nuclear programme and instead set a new deadline for November 24 ( see 'Nuclear Talks: Protracted Negotiations Likely',  February 26). Under the extension of the deal, conditions remain largely unchanged from the original November 2013 interim deal reached in Geneva. The agreement had provided Iran with the immediate gain of approximately USD7bn in sanctions relief, but did not lift any of the key economic sanctions on the Islamic Republic's banking and energy sectors.

H214 Oil Sales Steady Despite Slight H114 Uptick

Oil Exports To Remain Stable
Iran Oil Production, Consumption and Net Exports (000b/d)

BMI View : Iranian oil exports in the second half of 2014 will remain close to H114 export levels of 1.27-1.30mn barrels per day (b/d), as Tehran and the P5+1 countries agreed on July 18 to a four-month extension in talks on the nuclear programme. 

As expected by BMI, Tehran and the P5+1 countries failed to meet a July 20 deadline for a 'permanent' deal over Iran's nuclear programme and instead set a new deadline for November 24 ( see 'Nuclear Talks: Protracted Negotiations Likely',  February 26). Under the extension of the deal, conditions remain largely unchanged from the original November 2013 interim deal reached in Geneva. The agreement had provided Iran with the immediate gain of approximately USD7bn in sanctions relief, but did not lift any of the key economic sanctions on the Islamic Republic's banking and energy sectors.

H214 Oil Sales Steady Despite Slight H114 Uptick

Given the roll-over of the deal, we expect Iranian oil sales to remain broadly stable throughout the rest of the year, with oil exports in H214 close to levels seen in H114.

Oil Exports To Remain Stable
Iran Oil Production, Consumption and Net Exports (000b/d)

The first six months of the year saw Iranian oil exports rise slightly to average some 1.27-1.30mn barrels per day (b/d), up from 1.15-1.25mn b/d in 2013, according to data compiled from customs statistics and International Agency estimates compiled by Bloomberg.

While we had highlighted that a slight increase in crude oil exports is likely following the lifting of the shipping insurance ban on Iranian crude oil tankers ( see, 'Easing Of Sanctions Provides Limited Upside For Exports,' November 29 2013), we believe that part of this increase is attributable to an increase in condensates exports from Iran, which are included in oil export calculations by major international organisations. Condensates exports are not sanctioned under the international sanctions regime imposed on Iran in 2012, and condensates are in high demand from Asian countries with large petrochemical sectors, including India and China ( see, 'The Key Role Of Condensates In Total Oil Export Growth,' February 28).

When subtracting condensate exports (about 500,000b/d) from total oil export figures reported by international institutions, we estimate that the country likely exported some 1.22-1.25mn b/d of crude oil (excluding condensates) in H114, a slight increase from our estimate of about 1.10-1.20mn b/d of crude oil exported in 2013.

H214 exports will therefore remain at levels of about 1.20-1.25mn b/d. While the country may seek to maximise revenue by raising exports, increases will likely be slight, as H114 exports were already above sanctioned levels of 1.1mn b/d.

2015: A Year For Change?

We believe that the roll-over of the nuclear deal is an encouraging sign. As highlighted by our MENA Country Risk team, Tehran has met requirements agreed in the interim deal in November 24, having halted the most controversial aspect of its nuclear programme - uranium enrichment to a fissile concentration of 20%. It has also diluted or converted to oxide its remaining stockpile of the material - approximately 210 kg.

Also in Iran's favour, the global oil supply-demand market has been tight, with a mixture of geopolitical risk and supply disruptions having resulted in high supply and price volatility over the past months. We expect the tightness in the market to continue well into 2015, with supply problems in Libya, Kazakhstan, Iraqi Kurdistan and Iraq to continue ( see, 'Geopolitical Risk Will Linger In Brent, July 4).

The limited leeway in global supply, and the potentially dire effects of another large producer experiencing unplanned outages, could serve as an incentive for progress on the Iran talks, with the hope of seeing Iranian oil return to the market at full capacity. The US' relative clemency towards allowing Iranian crude exports of over the 1.1mn b/d could highlight the country's strong desire towards making progress.

However, a host of technical and political challenges will hinder the completion of a long-term deal on Iran's nuclear programme over the coming quarters ( see, 'Easing Of Sanctions Provides Limited Upside For Exports,' November 29 2013).

Along with our Country Risk team, we believe that the most likely scenario is therefore one of protracted talks between Iran and the West. This could take the form of a further extension of the current agreement following the November 24 deadline, or the announcement of a partial deal which would help build confidence in continued negotiations and weaken the position of hardliners on each side. However, this would be a long way off from a 'permanent' agreement. Core international sanctions would remain in place in the coming year, ensuring that the great majority of foreign investors, which have in recent quarters shown increased interest in Iran, would be forced to put on hold plans to enter the country. 

As such, in our view, a potential return of Iranian oil to the market is unlikely before end-2015-early 2016, at the earliest, where a significant easing of the oil export ban could come as part of a broader, final settlement.

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