THE west’s nuclear deal with Iran is set to intensify a battle for customers between the big oil producers, with Saudi Arabia raising output to record levels ahead of the full return to the market of its regional rival.

Iran was once Opec’s largest oil producer after Saudi Arabia but western sanctions have in four years halved its exports to just over 1mbpd.

While few analysts expect significant quantities of Iranian crude to be exported before 2016 as sanctions unwind, other producers are unlikely to make way easily. “It’s not just the return of Iranian barrels the market needs to watch,” said Olivier Jakob of Petromatrix, a Swiss consultant. “Gulf Opec countries and others are focused right now on growing their market share.”

Global output increases as nuclear deal reintroduces formidable producer

Tensions between Saudi Arabia and Iran are already high. The Sunni powerhouse has signalled its opposition to the nuclear deal and accused Shia-majority Iran of interfering in regional conflicts such as Iraq, Syria and Yemen.

Saudi Arabia has raised its crude production by 1mbpd since November, when it led the oil producers’ cartel in a landmark decision to defend market share in the face of rising US shale production, despite falling prices. Last week Opec said Saudi Arabia had self-reported a rise in output to a record 10.6mbpd in June, an increase of 230,000bpd from the previous month.

In part the increase reflects summer air-conditioning use boosting power demand in the desert kingdom, but some industry observers think Riyadh will not throttle back this year.

“We believe that core Opec producers will go on pursuing their volume- maximising strategy,” said UBS.

Oil prices have fallen almost 10pc this month and were trading near $58/barrel on July 14. They had averaged close to $100 from the beginning of the decade to last November.

Despite a global excess of crude, Iran has talked up its return to the market. It says it could almost double output to 5mbpd by the end of the decade, and is looking to attract at least $100bn in foreign investment.

European oil companies and traders, including Shell, Eni and Glencore, have visited Tehran to discuss post-sanction arrangements.

Iran is expected to be able to accelerate production by between 500,000-800,000bpd next year, although getting back to its 2011 level of 3.6mbpd is likely to take longer.

This week Opec said demand for its oil would increase in 2016 as lower prices boosted demand and curbed output from higher-cost producers.

But its own forecasts still indicate that the market will face at least 1mbpd of excess supplies.

Iraq, which has overtaken Iran as the second-largest Opec producer, has raised its output close to 4mbpd, a record. US shale companies have cut costs to try and keep output growing.

“Iran’s return is set to keep oil prices lower for longer, alongside ever-cheaper shale oil and peaking western world oil demand,” said Norbert Ruecker, analyst at Julius Baer, the Swiss private bank.

Published in Dawn, , Economic & Business ,July 21st, 2015

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