When Iranian nuclear sanctions were lifted in January, many thought that the country would struggle to bring its crude production quickly back to pre-sanction levels, not least due to years of underinvestment in ageing infrastructure, Gibson said in a report.
Defying these expectations, Iranian output surged from 2.9 mill barrels per day in December, 2015 to 3.6 million barrels per day in May, 2016 - an impressive 0.7 mill barrels per day gain.
Since then, however, the growth in production has slowed down. Monthly gains have been marginal, ranging between 10,000 to 30,000 barrels between May and October, with the latest assessment for total crude output at 3.72 mill barrels per day (Source - IEA).
In terms of export markets, Iran was largely successful in re-establishing trade links. China and India are the two largest buyers of Iranian crude, accounting for more than 50% of total exports. Between August and October, China imports averaged around 0.67 mill barrels per day and India around 0.62 mill barrels per day of Iranian crude. In terms of absolute volumes, crude trade to these countries is now higher than prior to the sanction period.
Crude shipments to South Korea were back to similar levels seen in 2008, but trade to Japan remained depressed, averaging close to 0.2 mill barrels per day in the three months to October, less than half the level back of 2008.
Similarly, at 0.6 mill barrels per day, trade to Europe and Turkey was strong but still 0.2 mill barrels per day short of volumes seen before the sanctions. Interestingly, westbound shipments are largely carried on Suezmaxes, while VLCCs are routed via Cape of Good Hope, Gibson said.
When sanctions were lifted, a major concern was the potential release of Iranian VLCC tonnage used for floating storage back into the market. At the time, Gibson said that the majority of the units would remain in storage for an extended period of time, which proved to be the case.
The number of VLCCs storing Iranian crude/condensate increased between January and March, 2016 from 24 to 28 units and only more recently has the number started to slip. At the end of October, 24 VLCCs were involved in Iranian crude and condensate storage - the same as in the beginning of the year.
However, going forward, floating storage is expected to continue to decline. It is widely believed that the majority of Iranian storage is condensate. The demand for condensate is firm in Asia and this could lead to a gradual draw down of condensate stocks.
Furthermore, Iranian media reports that the first phase of the Persian Gulf condensate refinery is expected to come on stream by March, 2017 and this is likely to support stronger domestic demand.
Finally, it will be interesting to see what role Iran plays in the proposed OPEC production cut. The country’s officials have consistently said that Iran will not discuss limiting its output until the pre-sanctions production level of 4 mill barrels per day is reached. The latest estimates put Iranian production at 0.3 mill below this level.
Longer term, prospects are strong for large increases in Iranian output and exports. However, for that to happen, Iran will need investment and the expertise of international oil companies, something that to date has largely failed to materialise.
Trump’s election also creates a new level of uncertainty, following the future US President’s criticism of the West’s nuclear deal with Iran, Gibson concluded.