Why OPEC needs to buckle Iran’s plan to produce 500,000 barrels per day

The re-emergence of Iran in the global oil market after the United States and other countries lifted many of its sanctions, threatens to add to the oil glut and has finally pushed the oil price to less than $30 dollar per barrel, its lowest since 2003.

fall in oil price

Iran announced plans to increase oil production by 500,000 barrels per day after western powers lifted many sanctions linked to the nuclear weapons sanction. This is not strange as Iran used to export 2.3 million barrels a day but its crude exports fell to one million in 2012.

Iran’s increased oil production will contribute to higher growth which faults the Organization of the Petroleum Exporting Countries (OPEC) decision to stabilize the price of oil by forcing non-OPEC countries to slow down production. If Oman, a non-OPEC member is ready to follow OPEC’s lead on oil cut in order to maintain stability, perhaps OPEC needs to be putting the pressure on Iran to gradually increase oil exportation.

Iran has the fourth-largest proven oil reserves in the world after Venezuela, Saudi Arabia and Canada, as well as the second-largest gas reserves, according to the IMF. Iran’s ability to export oil worldwide rather than just few countries while under sanction requires OPEC swift action to curb an increase in Iran’s export in order to avoid oil prices falling further between 5-10 percent, the IMF advised.

Of all OPEC members, Venezuela has been the hardest hit since 95 percent of its income depends on oil. Venezuela is currently undergoing its worst recession since the 1940s and the same can be said of other members whose economy is shrinking as a result of the persistent fall in the price of oil.

Iran already has a 3½-year roll over which implies some 46 million barrels of petroleum has been stored offshore alongside another 30-40 million barrels reportedly in storage on land. Iran; so thirsty for cash will quickly reclaim its lost market share in Europe at the expense of other oil exporting countries.

The proxy war between Saudi Arabia and Iran is set to be more complicated with Iran’s new decision to flood the market with oil. Saudi Arabia and Iran are two of the world’s biggest oil exporters. Saudi Arabia as at November exports 10.2 million barrels of crude oil per day while Iran produced 2.9 million barrels per day. This regional rivalry is set to fuel more tension which would in turn affect other OPEC members

No doubt, the lifting of sanction comes as a relief for Iran, but it is a disadvantage for other countries especially Saudi Arabia. This appear to be a looming oil war between Iran anbd Saudi Arabia whose hostility has been renewed this year. Saudi Arabia’s economy is about 95 percent dependent on hydrocarbons which implies and adverse effect on Saudi Arabia’s income and currency ’(riyal) which is currently heading to the highest level since 2003.

An estimated 285 million barrels will be added to stocks this year following Iran’s re-entry while production from non-OPEC countries will fall by 600,000 barrels a day this year, but Iran’s re-entry to the international market could fill the gap by the middle of 2016, putting further pressure on prices in a report released by the International Energy Agency. “Given the market is currently well supplied, Iran is likely to have to offer favorable terms, such as longer payment windows and discounts, to secure buyers. This is particularly true for heavy crude, given the heavy crude market is currently saturated,” the Financial Times reports.

Countries like Angola and Nigeria have been forced to overhaul their proposed budgets in order to deal with the severe fall in the price of oil. It is high time OPEC spoke with one voice in order to regulate the oversupply of crude oil in the global market especially considering global trends of slow economic growth in China and Europe.

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