Is Iran's Decision To Delay Heavy Crude Sales A Stealth Move To Freeze Production?

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Includes: OIL, USO
by: Gary Bourgeault

Summary

Iran announced it will delay introduction of new heavy crude sales from March to June.

This particular crude will probably compete in the Asian market against Iraqi oil.

Iran's post-sanction oil export strategy appears to be still in place.

Why any media reports about oil production freezes or cuts need to be read meticulously.

Every time something a little different happens in an OPEC member, there is immediate speculation as to whether or not it's a move to approve of or engage in a production freeze, or even better, is moving toward an agreement to cut production levels in order to support the price of oil.

That happened once again when Iran announced it was delaying its sales of heavy crude produced in the western part of the country near its border with Iraq, moving it from March to June.

Some media outlets immediately started suggesting this could be a move by Iran to participate in the proposed production freeze by Russia, Saudi Arabia, Venezuela and Qatar at a recent meeting in Doha. We'll look closely at it to see if it has any basis in truth, and whether it would matter or not.

With media outlets attempting to prop up the price of oil by releasing these types of stories, investors need to look closely at how the wording of the assertions are in order to understand what is exactly being said. For example, the news of a production freeze has been reported by many as an agreement, when in fact it was nothing more than a proposal that participants said others would have to agree to in order to be put into effect.

Following on the heels of that was the story put forth that this has a chance of leading to a production cut agreement, something immediately shot down by Saudi Arabia, which stated the strategy it has been communicating for some time will remain in place, which is to let market forces work out the price of oil. It has no interest or intention of cutting prices, yet the media report it as if that's the next step the industry is heading toward.

source: Christian Science Monitor

The delay in heavy crude sales

Where the source of Iranian oil being delayed is coming from, according to NIOC, is primarily the South Azadegan, North Azadegan and Yadavaran fields in the West Karoun region close to the Iraqi border. Being a new grade that hasn't been named or thoroughly tested yet, Iran pushed back the sales launch in order to give refineries time to test out and work with the heavier oil.

Production will go on as scheduled, with the heavy oil output expected to jump in March and April in preparation for the marketing push. According to the National Iranian Oil Co., another reason for the delay was to put together a marketing plan. Presumably the refinery testing needed to be engaged in so a clear marketing message could be put together as it competes against competitive grades in the same markets.

Supposition from Bloomberg says the new grade would probably compete against a similar blend of oil from Iraq in the Asian market - specifically its Basrah Heavy crude. Presumably Iran will attempt to gain market share by undercutting the price offered by Iraq.

There is nothing else to this story at this time, but some media outlets suggested this could be a way Iran is working to provide a way of supporting the proposed production freeze put together at Doha.

Iranian short-term output strategy

Before Iran was hit with sanctions, it was second only behind Saudi Arabia among OPEC members; now it stands fifth, although that will quickly change as it employs its strategy to boost output in the short and long term.

In the near term, Iran has the goal of quickly boosting production by 500,000 barrels per day, with it likely to hit that amount by March 20, 2016. This is outside the heavy crude we're talking about, so in that regard it'll have little or no impact on meeting expectations already in place for short term production growth.

For no other reason that makes it hard to believe this is a stealth attempt to line up to some degree with the freeze proposal initiated by Saudi Arabia and Russia. To provide even a modicum of support to the price of oil, it would have to be something that would quickly lock output in place by the agreeing countries. With Iran needed to make the proposed freeze become a reality, it means even that anemic strategy isn't going to come about.

As for the Karoun fields, they will generate output of over 1 million barrels per day once the overall expansion there is finished. That will be on top of the 500,000 ready to be brought to the export market. At minimum Iran wants to bring back the 2 million barrels per day it lost when the sanctions were put in place. I see nothing that will would convince Iran to alter that goal.

A freeze or production cut was always an illusion

I'm surprised the financial media ran with the oil freeze story so hard, as it was obvious from the beginning this wasn't a serious effort to change things. If it was, it would have included countries that would have had to have been on board in order for it to become a reality. The fact there were only the four countries at Doha, means it was a show meeting, and not a meeting meant to accomplish anything.

The other key factor was the freeze itself. It's highly disingenuous to have Russia and Saudi Arabia, which are producing at very high levels, meet together and ask many of their competitors to freeze production along with them. Russia is producing at post-Soviet highs, and another major competitor Iraq, is also bringing oil to the market at record levels. If all of them were to agree to a supply freeze, it does nothing to interfere with their sales.

Why did they have a meeting then? Partly to placate Venezuela, which is plummeting into economic chaos. The other was probably to put media pressure on Iran in order to push the blame toward that country once it starts to crank out production. Saudi Arabia has been taking a lot of the flack, and it looking for a scapegoat to relieve some of the pressure.

The point is a production freeze at a time when the major oil producers are already close to a ceiling on how much they can produce, makes it a irrelevant nod to an meaningless proposal.

Where it was having an effect on the market was the idea this would eventually lead to production cuts. Again, Saudi Arabia immediately dismissed that as something it would partake in, making a proposed freeze even less worthy of being taken seriously as a means of supporting the price of oil.

Conclusion

I went into some detail on Iran and the delay of its heavy oil from its western fields because it was tied into the proposed production freeze by some media outlets. As a story on its own it has no legs as far as having any short-term impact on oil, because the 500,000 barrels per day being brought to the market in March isn't part of that resource being referred to here. That is still going forward.

Over the weekend Iran added another 200,000 barrels of oil per day to its near-term production goal, meaning it's going add even more supply to the market in the near future.

So the idea of this having some type of long-term impact by an approximate 2- to 3-month delay doesn't make a lot of sense. I'm not even sure why it was tied together by some writers or reporters. This is why investors have to keep track of what's going on concerning fundamentals and what important competitors like Saudi Arabia have already said. Saudi Arabia time after time has rejected the idea of a supply cut. Even though it stated it would consider a 5 percent cut if others would do the same, when Russia stated it was willing to work with Saudi Arabia, it backed down. To me the reason it did was because there never was a chance OPEC and Russia were going to cut production by 5 percent and lose market share to their competitors.

We also need to watch how words are expressed in media stories. Some of had headlines assert there has been a freeze agreement, when in fact there never has been. All the meeting concluded was there was a willingness to participate in a production freeze if other countries agreed to do the same. One of those other countries is Iran, which everyone knows isn't going to agree to production cuts anytime soon, if ever. That's why these assertions are made. The Saudis and Russia know there is no chance of any real measures put in place to support oil. Again, all it would do would provide an opening for market share to be taken by others.

Media reports are going to continue to be released concerning anything that can be skewed to being a price support for oil. With it having such as strong effect on the economies of the world, and other sectors as well which are exposed because of low oil prices (such as some banks), there is no doubt there is a grasping at straws to find anything that may point to price support for oil. It's simply not there at this time.

Iran isn't doing something quietly to support a type of production freeze, and when the time comes to sell more oil into the market in June, it will ramp up marketing efforts and the global output will create a bigger gap between supply and demand. Be cautious of media spin and assertions that point to any other outcome.

Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.

I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.