Darkening horizon for US oil producers - the return of Iranian oil exports

The National Iranian Oil Corporation has started to talk to its clients in Asia, particularly in India, to estimate the demand for its oil since Joe Biden took office.  According to Refinitiv Oil Research, Direct and indirect Iranian oil shipments to China increased in the last 14 months, reaching a record high in January-February. Oil output has also grown since Q4 2020.

Iran pumped as much as 4.8 million barrels per day before the sanctions were reimposed in 2018, and S&P Global Platts Analytics expects an agreement could bring full sanctions relief by Q4 2021, which could see volumes ramp up to 850,000 barrels per day by December to 3.55 million barrels per day, with further gains in 2022.

Iran has confirmed its readiness to increase oil production sharply. As a result of the nuclear deal and the lifting of international and unilateral sanctions, the country could have increased its oil exports by 2.5 million barrels per day.

Much of Iran's production is of heavier grades and condensate, and a relaxation of the sanctions will put pressure on the likes of neighbouring Saudi Arabia, Iraq and Oman, and even Texas frackers.

The refining hubs of Asia – China, India, South Korea, Japan, and Singapore – have regularly processed Iranian grades, as the high sulphur content and heavy or medium density fit the diet of these complex plants.

European refineries, especially those in Turkey, France, Italy, Spain and Greece, are also likely to return to purchasing Iranian oil once the sanctions are removed, as the additional volumes figure to be price-advantaged to Brent-linked crudes from the Mediterranean.

US seeking to mend fences with China?

It will be possible to judge the obvious signs of such rapprochement by the degree of progress on the Iranian issue. If trade restrictions on oil with Iran are eased or lifted - the main beneficiary (the recipient of oil) will be China and Chinese companies - from the largest to a huge number of small and medium-sized businesses. The decision on Iran is an indicator of US-China relations much more than public bickering.

And all this is happening against a backdrop of hard pressure on the brink of economic terror against the American shale production, and Shell has already become a victim. It is impossible not to recall the letter from 12 senators to President Biden, who warned of the negative consequences of the current administration's energy policy.

US fuel under pressure: aggressive energy policy of the Biden administration

Pressures on the oil and gas industry are growing along with concern over climate change. The Biden era has started with sharp moves against fossil fuel. Nobody expected fossil fuel to come under such an immediate attack.

Biden signed an executive order aimed to end fossil-fuel subsidies that suspends new oil and gas leases on public lands and directs federal agencies to purchase electric cars. Fossil fuel stocks have plunged on his actions, and banks, including Goldman Sachs Group have warned of a drop in U.S. crude supplies.^[1]

Benefits to the climate from a ban on new oil and gas leases could take years to realise, according to economic analysts. Companies could respond by shifting some of their activities onto private lands in the U.S., and more oil would likely come in from overseas, said economist Brian Prest, who examined the effects of a long-term leasing ban for the research group Resources for the Future. As a result, almost three-quarters of the greenhouse gas emission reductions from a ban could be offset by oil and gas from other sources, said Prest. The net reduction would be about 100 million tons (91 million metric tons) of carbon dioxide annually, or less than 1% of global fossil fuel emissions, according to a study by a nonprofit research group.^[2]

President Joe Biden has directed the federal government to develop a strategy to curb the risk of climate change on public and private financial assets in the U.S. The move is part of the Biden administration’s longer-term agenda to cut U.S. greenhouse gas emissions nearly in half by 2030 and transition to a net-zero economy by mid-century while curbing the damage climate change poses to all economic sectors.

This strategy may occur in quite a significant number of job cuts in the oil industry and that is while the U.S. economy recovers from job losses arising from the pandemic. Even limited job losses could profoundly affect local economies in oil-dependent states (such as Wyoming and New Mexico).

US domestic opposition to Biden’s energy policy

A group of GOP senators led by Sen. Thom Tillis, R-N.C., sent a letter to President Biden in June. The senators see the strategy as “a fundamental threat to America’s long-term economic and national security”.^[3]

The senators have urged the president to "take immediate actions to put America back on a path of energy independence and economic prosperity."

"If we are to overcome the economic consequences of the pandemic, it is imperative that necessities such as fuel take as little out of family budgets as possible.” Senators also noted that high energy costs "disproportionately affect low- and fixed-income households."

Republican Senators Tillis, John Barrasso of Wyoming, John Thune of South Dakota, John Cornyn of Texas, Bill Hagerty of Tennessee, Kevin Cramer of North Dakota, Roger Marshall of Kansas, Steve Daines of Montana, Rick Scott of Florida, Cindy Hyde-Smith of Mississippi, Tom Cotton of Arkansas, John Hoeven of North Dakota and Marsha Blackburn of Tennessee signed the letter.

 OPEC: global oil market prospects for 2H 2021

An approximate growth in supplies in 1H 2021 amounted to 1.1 million barrels per day compared to 2H 2020. Following this, in 2H 2021, oil supplies from countries outside OPEC, including natural gas liquids from OPEC, are predicted to grow by 2.1 million barrels per day compared with 1H 2021 and by 3.2 million barrels per day year-on-year.

It is expected that supplies of liquid hydrocarbons from countries outside OPEC will increase by 0.84 million barrels per day year-on-year in 2021. At the regional level, in 2H 2021, it is expected that approximately 1.6 million barrels per day from total added production of 2.1 million barrels per day will come from OECD countries, with 1.1 million barrels per day coming from the USA and the rest – from Canada and Norway. At the same time, in 2H 2021, growth in supply of liquid hydrocarbons from regions other than OECD is forecasted at only 0.4 million barrels per day. In general, it is expected that the recovery of the global economy growth and, as a result, recovery of oil demand will gain momentum in 2H 2021.

At the same time, successful actions under the cooperation agreement have in fact paved the way for rebalancing of the market. This long-term outlook, along with constant and continuous joint monitoring of developments, as well as the expected recovery across various sectors of the economy, continue to indicate support for the oil market.

^[1] Fotune.com: https://fortune.com/2021/01/28/biden-climate-oil-and-gas/

^[2] AP.com: https://apnews.com/article/joe-biden-donald-trump-technology-climate-climate-change-cbfb975634cf9a6395649ecaec65201e

^[3] Foxnews.com: https://www.foxnews.com/politics/gop-senators-letter-biden-energy-policies

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