Out of all the energy journalists we follow, one of the best has to be David Sheppard from FT. He tweeted:
More source leaks came out last night and it looks like Saudi offered Iran to "freeze" its production at 3.7 million b/d, while Iran insisted on 3.975 million b/d. In October, Iran is estimated to have produced 3.7 million b/d. This implies that Saudi's deal was for Iran to freeze, while Iran's offer was not really an offer.
There is some interesting dynamic of power play here, and we think it has more to do with reputational issues, geopolitical events, and religious differences rather than economics that's stopping the deal from going through.
Iran's President, Hassan Rouhani, is facing election in May 2017, and he's received a lot of criticism since the Iran nuclear deal on foreign oil company investments and how Rouhani didn't leverage Iran's power to full. Iran's insistence on growing its production back to pre-sanction levels is just and fair, in our opinion, but it lacks one key ingredient to make it happen in the near future: capital.
Iran's low hanging fruits have all been picked, and hence another reason why Iran's oil production has largely stayed dormant since June.
Here's another interesting tidbit most journalists don't talk about or don't care to talk about. Here's what Iran's oil production looked like before:
Now, Iran has been under sanction since 1996 by the US, but it wasn't until 2010 that the Comprehensive Iran Sanctions, Accountability, and Divestment Act of 2010 came into effect. This act essentially punished companies and individuals who aided Iran's petroleum sector.
The law was enacted on July 1, 2010, and the proceeding impact was a decline in Iran's oil production from ~3.7 million b/d to ~2.7 million b/d. What's interesting to note, however, is that even prior to the 2010 act, Iran's oil production stayed between 3.7 million b/d to 3.8 million b/d. Spikes in oil (NYSEARCA:USO) production from 07-08 came when oil prices were over $100, and even then, Iran didn't average production over 4 million b/d for long.
With oil prices at $45, what logic can we apply to even think Iran will be able to grow production back to 4 million b/d? This is why we've long said that Iran won't grow production even if it wanted to, and the Saudis know that.
But because the Iran election is next year, and MBS needs to save face with the Saudis, the two are fighting a battle of toggle war here, and both sides don't want to appear "weak" to the other side.
We think there will be a compromise here with a production "freeze" of 3.8 million b/d. Iran knows that they are arguing for imaginary barrels, and when push comes to shove, they will take the sweetheart deal. For the Saudis, it will appear to be a victory as well, as optically it will appear that Iran softened its stance, and that it was a "good compromise."
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