Iran Kicks Off Plan to Boost Oil Exports as Sanctions Lifted

Iran is beginning efforts to boost oil production and exports amid a global supply glut after the removal of sanctions that shackled its economy and capped crude sales.

The Persian Gulf country is targeting an immediate increase in shipments of 500,000 barrels a day, Amir Hossein Zamaninia, deputy oil minister for commerce and international affairs, said Sunday in an interview in Tehran. Iran plans to add another half million barrels within months. The additional crude will push prices lower when it enters markets that are already oversupplied, said Robin Millsof Dubai-based oil consultant Qamar Energy.

“The oil ministry, by ordering companies to boost production and oil terminals to be ready, kicked off today the plan to increase Iran’s crude exports by 500,000 barrels,” the official Islamic Republic News Agency reported. Zamaninia said the plan is “still valid” and will be done in a “managed way to minimize the negative impact” on prices.

Buyers of Iranian crude are free to import as much of its oil as they want after the International Atomic Energy Agency determined that the country had curbed its ability to develop a nuclear weapon. As holder of the world’s fourth-largest reserves of crude and biggest deposits of natural gas, Iran gains immediate access to about $50 billion in frozen accounts overseas, funds the government says it will use to rebuild industries. The end of sanctions also opens the door to foreign investors such as Total SA and Eni SpA.

Benchmark Brent crude has dropped 23 percent this year and lost as much as $1.27 on Monday to trade at $28.53 a barrel at 9:34 a.m. in London, amid oversupply and the looming surge in Iranian output. Gordon Kwan, a Hong Kong-based analyst at Nomura Holdings Inc., said by e-mail that prices may drop as low as $25 a barrel on the same day. 

’Knee-Jerk’ Reaction

Prices will probably show a “knee-jerk” reaction, falling on Monday before recovering to more than $30 a barrel later in the week, Eugen Weinberg, Commerzbank AG’s head of commodities research in Frankfurt, said by telephone. “There is a real oversupply in the market, but I think that’s already reflected correctly in the price.”

Once the second-biggest producer in the Organization of Petroleum Exporting Countries, Iran is now fifth-biggest in the 13-member group. It produced 2.7 million barrels a day in December, data compiled by Bloomberg show. Oil exports fell to an average of 1.4 million barrels a day in 2014 from 2.6 million barrels daily in 2011, the year before the U.S. and European Union intensified sanctions, the U.S. Energy Information Administration said in June.

Volumes Uncertain

“There’s still the cloud of uncertainty around how much Iranian crude will come to market and when,” said Mills, Qamar Energy’s chief executive officer. The impact more Iranian barrels will have on prices will depend on how aggressive the country is in offering discounts and how quickly it ramps up sales, he said. Mills expects Iran can raise output by 600,000 a barrels a day over the next six months and add as much as 800,000 barrels of daily output this year.

Morgan Stanley too sees production increasing by 600,000 barrels a day in the first half of the year, though the longer-term outlook is less clear due to Iran’s uncertain investment environment, the bank said in an e-mailed report. JBC Energy GmbH expects Iran to boost output more slowly, by 255,000 barrels a day in 2016, it said in an e-mailed note.

Iran will probably start increasing exports by selling barrels it stockpiled on tankers in the Persian Gulf in anticipation of the deal. About 18 Iranian tankers are holding 12 million barrels of crude and 24 million barrels of condensates, according to the International Energy Agency.

Not ‘Sustainable’

“We do expect to see a substantial increase in exports over the coming weeks as Iran ships out the crude it had held in floating storage,” JBC Energy said. “However, this quick boom is not expected to be sustainable, and we see exports increasing by an average of 450,000 barrels a day over the year.”

Iran’s longer-term challenge will be to restore oil production, and it hopes to attract more than $100 billion of investment to revitalize ageing fields. The country plans to raise output capacity to 5.7 million barrels a day by the end of 2020, helped by new production contributed by potential foreign partners, Roknoddin Javadi, managing director of state-run National Iranian Oil Co., said in an interview in Tehran in November.

— With assistance by Ladane Nasseri, Grant Smith, and Rakteem Katakey