Iran Ramping Up Oil Production - For The Short And Long Term

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Includes: BNO, DBO, DNO, DTO, DWT, E, OIL, OILK, OILX, OLEM, OLO, SCO, SZO, TOT, UCO, USL, USO, UWT
by: Gary Bourgeault

Summary

Iran's oil output will increase to 4 million bpd by April.

Looking to drill 500 new wells over next 5 years.

Goal of producing 4.7 million bpd by 2022.

Another problem for oil price support as supply continues to soar.

Source: Stock Photo

Adding further pressure to the attempt to support the price of oil, Iran recently stated it will increase production to 4 million barrels per day by April, approximately 100,000 more barrels per day than it's producing now, according to Reuters, citing SHANA, the official news site of the Iranian oil ministry.

With the amount of supply coming from producers outside of the output cut deal launched in January, it puts even more pressure on the price of oil, which has continued to be in the $50 to $55 per barrel range, with the most likelihood it'll break downward with the fundamentals favoring more, rather than less production going forward.

This is the reason OPEC in particular is already floating the idea of deepening and extending the cut: it isn't working. Only about 50 days into the 6-month deal, it is already considered to be ineffective in producing the desired results.

Iran production in the short term

National Iranian Oil Company (NIOC) head Ali Kardor, was recently cited by the Iranian Students' News Agency (ISNA) as saying the country was going to produce 4 million barrels per day by April. That's about 100,000 more than the approximate 3.9 million barrels per day produced in January.

That will probably occur earlier, as Kardor said he sees oil output reaching 4 million barrels per day by the end of the Iranian year, which is on March 20. Either way, this isn't a insignificant amount when considering the U.S. is rapidly increasing production, and Canada and Brazil are expected to add over 400,000 more barrels per day to global supply in 2017.

This also doesn't account for the 500,000 more barrels per day to be added by Libya by August 2017, according to a statement from National Oil Corp., the state oil company.

Jadalla Alaokali pointed out that Schlumberger (SLB) once again started operations several months ago. Libya is now producing over 700,000 barrels per day, after being under pressure from internal strife. It sees output reaching 1.2 million barrels per day by August 2017 and climbing to 1.7 barrels per day by March 2018.

This is a lot of oil coming to the market in the short term when included with Iran's projections. Strangely, the market continues to discount the enormous increase in supply coming in 2017. OPEC now understands it, which is why it's already looking to deeper and longer cuts after the existing deal is completed.

Long-term Iranian production goals

Over the next five years, Iran says it'll drill another 500 wells, with the goal of boosting output to 4.7 million barrels per day. The new drilling will start in March or April.

This plan is more in line with my outlook for growing global demand for oil, which should be rebalanced by that time and the market pressured to provide the needed supply of oil.

At this time Eni (NYSE:E) and Total (NYSE:TOT) should be the major beneficiaries over the long term, of the publicly traded companies working in Iran. Other companies will probably be slow to work or increase their presence in the area until it's clearer how the geopolitical situation with the U.S. plays out.

Conclusion

Iran is another reason investors should take a harder look at the impact of the output cut agreement, which has obviously reached the ceiling of its influence as related to the price of oil. Not only that, the market is ripe for a correction as the outlook for supply continues to increase, while the OPEC deal is seen as very weak and representative of a time when the oil market was much different than it is today.

My thesis has been and will continue to be that the oil market has been completely disrupted with the emergence of the U.S. shale industry, which has propelled the U.S. to become the global oil leader. The amount of oil expected to come from the shale sector, when combined with those producers mentioned above, is easily going to offset the oil allegedly taken off the table from the output agreement.

It's not going to take too long before the market realizes how much oil is coming to the market in the near term, and how ineffective and irrelevant the output cut deal is and will be. OPEC knows this, which is why, again, it's so quickly talking deeper and longer cuts.

Anyone believing all the OPEC and other participants in this deal are going to quietly sit by and see market share ripped out of their hands, in my opinion, have to be completely naive, or have their head in the sand concerning the fact shale has permanently changed the dynamics of the oil market. Don't be one of them.

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.