A recurring oil market theme in the past few months has been the speculation that despite its jawboning that it is ready and willing to boost crude production, Iran has had a hard time getting both the funding and the required infrastructure to substantially boost its production to recapture its supply levels last seen before the recent US sanctions. That however appears to be changing fast.
Recall all those tankers we have profiled before on anchor next to the Iran shore?
They have finally started to move.
According to Bloomberg, tankers carrying about 28.8 million barrels of crude, or more than 2 million a day, left the Persian Gulf country’s ports in the first 14 days of April, according to tanker-tracking data. That compares with a rate of about 1.45 million barrels a day in March. As a result, Iran’s crude shipments have soared by more than 600,000 barrels a day this month, adding to the pressure facing producer nations as they prepare to meet in Doha to discuss freezing output to prop up oil prices.
Putting that number in context, 600,000 barrels a day is precisely how much US oil production has declined by since peaking late last year as a result of the collapse in oil prices and the mothballing of various rigs.
Where is all this fresh oil headed? According to Bloomberg, most of these tens of millions in fresh barrels of oil are headed to China which will be the biggest recipient of Iranian crude loaded so far this month, while flows to Japan are resuming after halting in March, the tracking data show.
To be sure Iran is taking advantage of supply disruptions at other OPEC exposrters: Nigeria and Iraq saw a combined decline of 90,000 barrels a day, according to the International Energy Agency.
As Bloomberg notes, and as the IEA stated earlier today, the long-overdue surge in Iran volumes confirm that the much anticipated rebalancing of the oil market will have to come from countries outside OPEC - read US shale - provided that crude prices don’t rise too far, said Ole Hansen, head of commodity strategy at Saxo Bank A/S. If Iran "can keep up sales of that magnitude during the coming months when supply disruptions from northern Iraq and Nigeria begin to fade, we may have to look a bit further out for that rebalancing," he said.
Of course, there is another problem: what if it is not just a supply problem. What if it is demand, and what if all those skeptics who are warning about a global slowdown are right and the market remains drastically oversupplied (according to Saudi Arabia to the tune of 2-3mm bbl/day, and keep in minda the Saudis have another 2mmb/d in spare capacity that can be turned on rather quickly)?
Just yesterday OPEC cut its estimates for demand growth in 2016 by 50,000 barrels a day because of a slowdown in Latin America, projecting worldwide growth of 1.2 million barrels a day. Other factors for the drop in demand: weakness in Brazil’s economy, the removal of fuel subsidies in the Middle East and milder winter temperatures in the northern hemisphere could prompt further cutbacks.
Because if Iran can singlehandedly offset the entire US production decline to date with what modest capacity it has, just how will the oil market "rebalancing" which every has pegged for the second half of 2016 actually take place? And more improtantly, what happens when the contango finally flattens and that 100+ million in oil stored offshore has to be brought onshore.