Scenarios for Iranian Oil's Return to Market

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Iran's capacity to raise its oil production and exports has come under close scrutiny amid speculation that a deal could soon be reached to revive the 2015 agreement that lifted sanctions on Tehran in exchange for curbs on its nuclear program.

Energy Intelligence's Research & Advisory service has drawn up three scenarios that could unfold in the coming weeks and months, depending on how talks in Vienna between Iran, the US and other nations play out.

Iran's position is clear: it says it can — and will — ramp up oil output swiftly once sanctions are lifted.

That would provide some relief to a crude market in which prices have recently risen to the mid-$90s per barrel because of rising global demand, production constraints, dwindling spare supply capacity and geopolitical tensions.

It's still uncertain whether the Vienna talks will result in a return to the so-called Joint Comprehensive Plan of Action (JCPOA).

But if the US and Iran both agree to rejoin the agreement, Iran is widely believed to be capable of boosting its oil output relatively quickly — as it did after the JCPOA came into force in January 2016.

At the time, it took Iran just three months to ramp up its crude production. Exports that had been running at less than 1 million barrels per day at the end of 2015 rose to more than 2 million b/d by April 2016, surprising many industry experts.

Iranian officials are adamant that Opec's former No. 2 producer could repeat that kind of performance.

And while it took six months for the JCPOA to take effect after it was signed, the phasing in of a new deal could take less than three months.

Three Different Scenarios

Energy Intelligence's Research & Advisory unit has drawn up three production and export scenarios based on how quickly an agreement can be reached — and how rapidly Iran could then increase production.

The breakthrough scenario shows a relatively swift increase in production and exports, tempered mostly by the time it takes for the US and Iran to verify each other's compliance, technical constraints and reticence among customers.

Under this scenario, Iranian output would rise from around 2.5 million b/d now to 3.25 million b/d within three months and reach 3.7 million b/d by year's end.

That would imply a ramp-up in exports to around 1.5 million b/d and 2 million b/d respectively, assuming levels of nearly 800,000 b/d in January.

For this scenario to come to fruition, Iran would have to encounter only limited technical constraints, allowing it to raise production in a fairly short period of time.

If Trump-era sanctions and those that predate the JCPOA prove more burdensome, the rise in output could be more modest, as reflected in the slow-going scenario.

Under this scenario, output would climb slowly to about 3.1 million b/d by the end of 2022, limiting the rise in exports to around 1.4 million b/d.

If the Vienna talks collapse, the no-deal scenario shows a decline in both production and exports, with a return to Washington's "maximum pressure" sanctions campaign negatively impacting Iran's economy and demand for its oil.

Without a deal, Iran would likely find it harder to sell its crude, even to Chinese buyers that have stepped up their purchases in recent months.

As a result, Iranian exports could fall below 500,000 b/d, as happened in 2019 after the Trump administration pulled the US out of the JCPOA in 2018.

Under the no-deal scenario, Iranian production could also remain flat, depending on the degree to which US sanctions were enforced. This could potentially maintain exports at around 700,000-800,000 b/d.

Oil Held in Storage

If a deal is reached, Iranian exports could get a quick boost if the country decides to release large volumes of crude and condensate presently stored in floating and onshore storage at various locations.

An industry source said Iran is estimated to be holding some 30 million bbl of condensate alone in floating storage.

In its latest monthly report, the Paris-based International Energy Agency said the combined volume of Iranian crude and condensate stored in tankers is about 80 million bbl, which it would aim to sell quickly if a deal is struck.

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