Increases in Iranian oil production to take time: Fitch Ratings

Iranian crude oil production is likely to increase in 2016 but will take years to reach its previous peak, Fitch Ratings says in a statement issued today.

Iran exports 1.1 million barrels a day (b/d) now compared with around 2.5 million b/d before 2012.

“Once the deal is approved by national governments, the relevant sanctions have to be removed,” Fitch says. “The parties have outlined a staged approach which will only begin when Iran has met initial commitments. These are far from trivial. They include the removal of the core from Iran’s heavy-water reactor in Arak, the dismantling of centrifuges, and the shipping out of the majority of Iran’s stockpile of enriched uranium.”

“We would expect to see some increases in production throughout the course of 2016 but that this would be less than half of the full 1.4 million b/d that was lost,” Fitch says. “The remainder will require significant investment and expertise – for which Iran is likely to want to partner with international oil companies. These projects typically take many months to agree, as oil companies and governments manoeuvre for the best terms, and often years to implement.”

Higher Iranian oil production in 2016 will delay the recovery in oil prices. Fitch says it still expects an improvement in prices next year as demand grows and the cuts in investment since the price collapsed show through in areas other than US shale.

“However, we believe it will take two-three years for prices to recover to their marginal cost of around $80 a barrel,” Fitch says. “A wild card is the estimated 40m barrels of crude Iran has in storage – we believe this will only be offloaded gradually into the markets to maximise value.”