Moody's: Iran entry to worsen oil glut

Issac John

Dubai: Iran's return to the global oil market will add supply to an oversaturated market, but the country faces challenges in ramping up its production, says Moody's Investors Service.

The additional supply from Iran will contribute heavily to a global oil oversupply that is already likely to outpace demand for at least the next few years. The world oil production now exceeds demand by about two million bpd. But Iran's difficulty in securing additional customers, and the procurement needs of its current customers, will constrain its ability to sell additional crude in global markets, the rating agency said.

As Opec and many non-Opec oil producers battle for market share by continuing to produce at capacity, Iranian crude will likely replace a 500,000 bpd decline in US production in 2016 in global oil markets.

Iran, which has the world's fourth-largest reserves of oil, has one of the lowest marginal costs of production anywhere, an estimated $15/barrel. Decades of under-investment have stymied Iran's oil and gas sector, whose production has fallen substantially to 2.8 million bpd in 2015, down from 3.8 million bpd in 2010, according to the US Energy Information Administration.

While Russia and Saudi Arabia agreed on February 16 to freeze their oil output in an attempt to stabilise prices, that deal doesn't yet include Iran. Moody's forecasts that Iran will add more than 500,000 barrels per day (bpd) to the global oil market in 2016.

Europe once imported 600,000 bpd of Iranian crude, including about 120,000 bpd to Greece, Iran's largest European oil customer, in 2011.

The EU's 2012 ban on Iranian crude imports strongly benefited Russia; in 2015, Russia exported over 400,000 bpd to Iran's previous EU customers.

With the lifting of sanctions, Iran is eager to recapture its previous customer base. Greece's largest refinery, Hellenic Petroleum said on January 22 that it had agreed to buy oil from the National Iranian Oil Company.

Iran will likely look to regain market share among other customers of Russian oil, including refiners in Spain and Italy. Iran also has hopes to export more crude to Asia, especially China. While Saudi Arabia is China's largest crude supplier, China is Iran's biggest trade partner and continued to buy oil from Iran after December 2011.

However, Iran still faces significant hurdles to boost its oil production meaningfully beyond those levels. To raise production, Iran needs to regain its customer base, attract investment to upgrade its oil fields and successfully navigate a range of political risks.

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