Saudi Arabia Calling Iran's Bluff - Oil Markets Daily

| About: The United (USO)

Summary

OPEC proposes to Iran to freeze production at its "claimed" 3.92 million b/d.

Iran's current oil production is only 3.7 million b/d.

The offer is where Saudi is calling Iran's bluff about its ability to ramp up production to 4 million b/d.

News leaked last night that OPEC proposed to Iran to allow it to freeze production at 3.92 million b/d.

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There are several important implications with this news release and goes to highlight how much Iran has been bluffing as of late. According to IEA's latest estimate and secondary sources, Iran's oil production is currently somewhere between 3.7-3.8 million b/d. So the proposed cap of 3.92 million b/d indicates Saudi Arabia's willingness to allow it to grow production by another 100-200k b/d. We believe this offer is one where Saudi Arabia is calling Iran's bluff about its ability to increase production to 4 million b/d. The offered 3.92 million b/d figure is generous in the sense that it's higher than Iran's current production, but below the 4-4.2 million b/d range Iran has insisted on.

From our past OMDs, readers will know that Iran hasn't been able to meaningfully increase production since May this year. All the low hanging fruit has been picked, and Iran needs to spend billions on capex and infrastructure if it wants its production to increase meaningfully. The temporary production increase won't be sustainable, and Iran has had very little luck courting International Oil Companies (IOCs). With Trump now as president, the possibility of revoking the Iran nuclear deal is in play, and the uncertainty surrounding the issue will force IOCs away from any Iran investment.

Facing an uncertain nuclear deal and $45 oil (NYSEARCA:USO), Iran can either fold its bad 2/7 off suit hand or bicker with other OPEC countries to the end. The fact is Iran won't be increasing production to 4 million b/d anytime soon. Money doesn't fly out of the sky and infrastructure doesn't appear out of the ground overnight. Many of these long-term production increases require time, capital and expertise to execute and all of which Iran has very little at the moment.

We believe the proposed offer to Iran is a very generous one and Iran should agree. Saudi Arabia knows full well that Iran won't be able to increase production even if it wants to, and Saudi Arabia is calling Iran's bluff. We think Saudi Arabia is making the right move.

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