US oil production marches on while Iran wildcard looms

The steady rise in US oil production continues as the dominant supply side issue for the market, while the big wildcard for Opec policymakers is how to accommodate additional exports from Iran if there is a breakthrough in talks over its nuclear programme.

These two issues, together with the weakening in the global economy, are putting immense pressure on Opec to agree at least the semblance of an export quota-cutting deal in time for the oil ministers’ meeting at the end of next month.

The latest oil status report from the US energy information agency on Friday provided no relief.

The agency reported that domestic US crude oil production was running at just under 9 million barrels per day over the previous four weeks, up 15 per cent year-on-year and up from 8.7 million bpd in September, which itself was the highest monthly production since July 1986.

US imports of crude oil, meanwhile, were running at just below 7 million bpd, or about 13 per cent below the previous year.

In its outlook last week, the EIA forecast US domestic crude production will average 9.5 million bpd next year, which would be the highest annual average crude oil production since 1970.

That would push Opec’s production surplus higher next year, even before accounting for any additional amount coming from Iran. The EIA expects Opec surplus crude oil production capacity – which is concentrated in Saudi Arabia – to average 2.2 million bpd this year, rising to 3 million bpd next year.

“Those estimates do not include additional capacity that may be available in Iran but is offline because of the effects of US and European Union sanctions on Iran’s ability to sell its oil,” the EIA reported in its short-term outlook.

Since the adoption of sanctions targeting Iran’s crude exports in 2012, Iran’s crude exports have slumped by more than 1 million bpd to 1.3 million bpd, despite a slight easing of the restrictions agreed last July in a deal that runs out at the end of next month.

Although the likelihood seems remote that Iran will reach a comprehensive deal in talks currently under way in Vienna by next month’s deadline, it is likely to agree an extension of the current deal, possibly on improved terms, according to the Harvard University international affairs expert Gary Samore.

“Both sides will have an interest in trying to see whether it’s possible to work out an extension, because the status quo, even though it’s not perfect, is certainly tolerable,” Mr Samore said last week in an interview with the Council on Foreign Relations, a nonprofit US think tank.

Alrhough Iran and the US remain far apart on the core issues of Iran’s uranium enrichment programme, the two countries have a common interest in dealing with ISIL militants in Iraq. “Both sides will have an interest in not allowing a confrontation or increased tension over the nuclear issue to interfere with the campaign against [Islamic State]. I expect an effort will be made as we get down to the deadline to see if there’s a basis for another partial agreement,” according to Mr Samore.

In any case, although Opec may not have to deal with the immediate prospect of an additional 1 million bpd of Iran exports coming on to the market, it will be under pressure to at least begin to explain to the market how it will deal with additional Iranian supply once sanctions are eased, said Jason Tuvey, an energy analyst at Capital Economics in London. “There are currently no provisions for absorbing that supply,” he said.

A plan to deal with a ramp-up of Iranian exports is on top of whatever measures Opec takes to deal with the oversupply created by the US production surge.

amcauley@thenational.ae

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