OPEC: Iran will Take the Deal

IRAN will take the deal:

  • OPEC has offered IRAN a cap of 3.92 mbd
  • That will bring Iran's OPEC production percentage to 12.1%
  • This is n-line with where they wanted to be (above 12%)

Saudi Arabia has also set a production ceiling of 32.5 mbd for OPEC in total.  This does not take into account outside participation.  We believe that Russia will cap production at January levels, equating to a cut of roughly 200K barrels, and Oman will add 75K barrels, but others may also participate. 

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As it stands, if OPEC drops production to 32.5 even with IRAN, IRAQ, Libya, and Nigeria concessions, which we believe they can do, demand will exceed supply in 2017 by 800K barrels per day, turning the oversupply issue on its head.

Anything from outside sources will be an add to that imbalance.  If Russia and Oman participate at the levels we expect, that would cause demand to exceed supply right now, and in 2017 Demand would exceed supply by more than 1 mbd. 

This is big.

We believe that Iran will take the deal because they are getting what they want.

In addition, we need to consider timing and added supply.

Debates about added supply exist, and largely they are right.  IF prices increase supply will likely increase from US producers and other higher cost producers, and this argument is relevant.  We agree that added supply will come online again IF producers believe higher prices will hold. 

They must believe the higher prices will hold though, because ramping up production requires adding to costs, and currently costs have been cut to bare minimums wherever possible.  This is not as simple as 'price increases - production increases' because there must be confidence that the higher prices will be maintained.  If not, adding to expenses could result in major problems if prices fall back.

As much as we believe in the eventual higher price-production relationship, we also recognize it as also dependent on higher prices coming.  That supports our immediate position, and that is that oil prices are set to increase, with the support of OPEC.

Also, very reasonably, OPEC has determined that underinvestment in production recently may give them even more breathing room, time, and opportunity to reap big rewards if they can cause prices to surge now, because investment has been so low.  If prices surge OPEC probably has 18 months before any new investment pressures start to surface.  That makes this, a time where everyone seems bearish on oil, an exceptional time for OPEC to take action.

They are, after all, in the business of making money and supporting their economies, they have caused investments in the space to decline substantially by adding supply and pressuring prices, some have been driven out of the business, and it will take time and confidence for others to ramp back up, and in addition to vested interests that extend beyond the obvious they may see this as the best opportunity to reverse course.  It helps that Iran is at its objective too.  They will take the deal.