TODAY.AZ / World news

Iran may attempt to maximise its production in excess of OPEC+ quotas: Fitch

11 May 2018 [14:50] - TODAY.AZ

By  Trend


The reinstatement of US sanctions against Iran announced on 8 May 2018 and the resulting potential sustained loss of Iranian exports increase the chances of the global oil supply-demand balance remaining in deficit in 2018-2019, Fitch Ratings says.

“This creates upside risks for oil prices relative to our existing assumptions. However, the ultimate consequences for the oil market and prices are difficult to predict since the currently high level of oil prices and the threat of an oil deficit could prevent OPEC+ from reaching a consensus and extending the production cuts deal in its existing form into 2019. This, coupled with continued US shale growth, could swing the market back into surplus. In addition, Iran may now attempt to maximise its production in excess of the OPEC+ quotas,” said the report from Fitch.

Fitch experts believe that the dynamics of oil production in Iran will be one of the key factors driving the global oil supply-demand balance in the medium term.

“Iran ramped up production significantly from 2.8 million barrels per day (mmbpd) in 2015 to around 3.8mmbpd in 2017 after sanctions were lifted in late 2015. To put this into context, the OPEC+ countries agreed to cut production by 1.8mmbpd relative to the October 2016 level. A part of this 1mmbpd upside is at risk following the US announcement, depending on which countries continue to buy oil from Iran. Iran exported 2.7mmbpd before the announcement, representing around 3% of global crude supply,” said the report.

Fitch believes that Iranian production is unlikely to decline immediately as sanctions will be reintroduced at the end of the 180-day wind-down period applicable for petroleum-related activities.

“Moreover, Iran may attempt to increase its production and exports now before the sanctions have been put into force. Oil prices have increased following the US announcement, albeit not dramatically as this move had been widely anticipated and had been factored into the elevated prices in the period preceding the announcement,” said the report.

The US decision increases the possibility of the global supply-demand balance remaining in deficit in 2018-2019, Fitch analysts believe.

“This means that Brent oil prices may remain above USD70/bbl for some time, partly reflecting the geopolitical risk premium that has come back into the prices. However, we believe these high oil prices may not be sustained for long, assuming: (i) most global oil producers have broadly adjusted to the USD50-60/bbl range; and (ii) rising US shale production,” said the report.

In addition, according to Fitch, the US move reduces the chances of the OPEC+ deal being extended in its current form beyond 2018, as Iran is now unlikely to support it.

“Absent the deal, the OPEC countries may choose to expand their crude oil production, which could shift the market back into surplus. In this scenario, prices ultimately may come back within the USD50-60/bbl range,” said the report.

Global oil producers are set to benefit from the elevated crude prices due to higher cash flow generation, especially given that most of them have re-set their cost base since oil prices collapsed in 2015, according to Fitch experts.

“However, as oil prices may not be sustained at their current levels, we base our ratings on a conservative assumption of USD57.5/bbl for Brent. Our ratings are ultimately more correlated with the ability of issuers to adjust to various levels of oil prices, rather than the absolute price levels. Hence, cost control, investment discipline, and dividend and financial policies continue to be our key credit considerations for corporate ratings,” said the report.

The US President Donald Trump announced that he will pull the US out of the nuclear deal, known as the Joint Comprehensive Plan of Action (JCPOA).

The US will re-impose the nuclear-related sanctions on Iran’s economy and oil exports, which were waived under the JCPOA. Whilst the sanctions are effective immediately, there is a wind-down period of 90- or 180-days to allow firms to exit any existing agreements they have with Iran. Trump has also hinted that he might impose additional sanctions on top of those which were waived.

URL: http://www.today.az/news/regions/169926.html

Print version

Views: 710

Connect with us. Get latest news and updates.

Recommend news to friend

  • Your name:
  • Your e-mail:
  • Friend's name:
  • Friend's e-mail: