Under deal, Iran’s oil exports likely to rise from recent depressed level


MAHSHAHR, IRAN - View of Iran's oil industry installations on September 28, 2011 in Mahshahr, Khuzestan province, southern Iran. (Kaveh Kazemi/Getty)
November 24, 2013

The nuclear deal with Iran will allow the country to export more crude oil than it did in October, although still slightly less than it has averaged this year, according to estimates by the International Energy Agency.

The deal also will suspend U.S. pressure for progressively deeper cuts by importers of Iranian crude oil, including countries such as China, India, Japan and South Korea that would have come up for new sanctions compliance reviews by the State and Treasury departments on Dec. 2, oil analysts said.

U.S. sanctions require that nations buying crude from Iran show “significant reductions” in those purchases, a central part of the strategy of squeezing Iran, which in 2012 relied on oil sales for 80 percent of its export earnings and more than half of its government revenue. That oil export revenue fell by about one-third this year.

During the first nine months of the year, Iran exported an average of 1.1 million barrels a day, the IEA said in its most recent monthly report on the oil market. And the White House fact sheet on the deal said that “Iran will be held to approximately 1 million bpd [barrels per day] in sales.”

Yet Iran exported only 715,000 barrels a day of crude oil in October, according to IEA estimates. The agency said that the National Iranian Oil Co. was having so much trouble selling oil that it had stored 37 million barrels on tankers awaiting customers.

In early 2012, Iran was exporting about 2.5 million barrels a day.

The drop in October “probably wasn’t just a freak occurrence due to accumulating stockpiles and seasonal refinery turnarounds,” said Kevin Book, managing director of Clearview Energy Partners, a consulting firm, but rather came because “China, India and South Korea were due for another sanctions review.” He said, “October would have been inside the window for consideration, so a particularly good month to minimize Iran imports.”

Robert McNally, who served on President George W. Bush’s National Security Council as an adviser on energy affairs and who is now president of the Rapidan Group, a consulting firm, said: “The deal included an explicit if partial easing in oil sanctions. This was unexpected, as officials had been strongly signaling oil would be untouched in the preliminary deal. It eases sanctions by replacing current U.S. law’s requirement for ‘significant reductions’ with holding steady.”

Although the White House fact sheet said nothing about European insurance sanctions, there was speculation in the oil industry that Iran and its customers would be able to buy insurance and re­insurance for tankers carrying oil within the limits of the nuclear deal.

If true, that would ease pressure on Iran to cut prices to lure buyers. “I would think they’d get better prices and a more willing customer, especially in India,” McNally said. “Also, I suspect you will see importers willing to buy more crude in general as they will fear U.S. sanction less.”

Buyers of Iranian oil also were waiting to learn more details of the partial easing of financial sanctions, which have barred companies from dealing with Iran’s central bank and thus from making payments for oil. Back payments for crude oil make up the overwhelming majority of the tens of billions of dollars owed to Iran. In India, for example, some oil payments were made to an account in India’s currency, the rupee, which was used to pay for Iranian imports of Indian goods.

The White House fact sheet said that $4.2 billion from new crude oil sales “will be allowed to be transferred in installments if, and as, Iran fulfills its commitments.” That would be over a six-month period. If Iran exports 1 million barrels a day during that period, the sales would be worth, at current prices, about $19 billion. The White House fact sheet said that frozen payments owed to Iran would increase over the six-month period.

Prices on world oil markets could ease on news of the deal, and Iran has been making overtures to Western oil companies in anticipation of an easing of sanctions. But some oil analysts doubted whether the Obama administration could overcome congressional and Israeli government criticism.

In electronic trading early Sunday evening, the price of the European benchmark crude, Brent, was down $2.55 a barrel, to $108.50, for January delivery. The price of the U.S. benchmark, West Texas intermediate, fell 77 cents, to $94.07 a barrel, for January delivery.

“There is heady optimism in the oil markets about getting a final breakthrough,” said Helima Croft, an oil analyst at Barclays Capital. “People are not ready to concede right now that there are all these potential pitfalls and land mines.”

Croft added that “these are baby steps right now. Important baby steps, but whether ultimately you can get Congress to agree to allow Iran to maintain this many capabilities remains to be seen.”

Even if Iran can boost its exports back to 1 million barrels a day for now and even more later, the balance in the oil market could still be maintained — at high prices — by Saudi Arabia, which had been pumping crude oil at near- record rates of 10.2 million barrels a day until October, when it trimmed output to 9.75 million barrels a day. The kingdom, the swing producer for the Organization of the Petroleum Exporting Countries, says it can produce as many as 12.4 million barrels a day.

Steven Mufson covers energy and other financial news.
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