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Business News/ Markets / Commodities/  Iran's crude oil output up 20% in 2 years at 3.3% of global supply: What does this mean for the Iran-Israel proxy war?
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Iran's crude oil output up 20% in 2 years at 3.3% of global supply: What does this mean for the Iran-Israel proxy war?

Iran's crude exports in March averaged 1.61 million bpd according to industry analysts, the highest since May 2023 when they were 1.68 million bpd, the highest since 2018.

Iran-Israel conflict: Gas flares from an oil production platform, as an Iranian flag is seen in the foreground, at the Soroush oil fields in the Persian Gulf, some 1,250 km (776 miles) south of the capital Tehran in this file photo. REUTERS/Raheb Homavandi/Files (IRAN - Tags: ENERGY POLITICS) (Reuters)Premium
Iran-Israel conflict: Gas flares from an oil production platform, as an Iranian flag is seen in the foreground, at the Soroush oil fields in the Persian Gulf, some 1,250 km (776 miles) south of the capital Tehran in this file photo. REUTERS/Raheb Homavandi/Files (IRAN - Tags: ENERGY POLITICS) (Reuters)

Iran's crude production has risen by more than 20 per cent over the past two years to 3.4 million barrels per day (bpd), which is 3.3 per cent of the total global oil supply. With the ongoing proxy conflict with Israel, analysts say that if the market were to price a higher probability of reduced Iran supply, then this could contribute to a higher geopolitical risk premium amid supply concerns.

Iran is the third largest producer in the Organization of the Petroleum Exporting Countries (OPEC) cartel--led by oil kingpin Saudi Arabia. Iran has already been a target of Western sanctions, however if the supply is disrupted due to the ongoing war, it could cause a surge in international crude oil prices.

Follow Iran-Israel Conflict Live Updates: Israeli war cabinet to meet again on response to Iran's attack

Timeline of Iran's crude oil production

Despite being a member of OPEC and OPEC+ (which brings together OPEC and allies, including Russia) Iran is exempt from the group's output restrictions that are designed to support the oil market, because of the sanctions imposed on it.

Driven by the strong Chinese demand last year and continuing into 2024, Iran's crude exports in March 2024 averaged 1.61 million bpd according to industry analysts Kpler, the highest since May 2023 when they were 1.68 million bpd, the highest since 2018, said news agency Reuters.

The US has sought to limit Iran's oil exports since President Donald Trump exited a 2015 nuclear accord between Western nations and Iran in May 2018 and re-imposed sanctions aimed at curbing Iran's revenue and oil sales to zero.

The peaks of 2018 reflected the easing of sanctions that followed the 2015 nuclear deal with Iran. The crude and condensate exports reached 2.8 million bpd in May 2018, the highest since at least 2013 according to industry analysts Kpler.

In May 2018, the crude oil portion of Iran's exports was 2.51 million bpd, Kpler found. According to OPEC data, that was the most since 2011 when Iran exported around 2.54 million bpd. Iran stopped providing data on exports, but assessments based on tanker tracking showed they fell sharply in the next two years to below 200,000 bpd in 2020, the lowest since1980, as per OPEC data.

Also Read: Wall Street is betting OPEC+ can fend off $100 oil

In late 2020 Joe Biden won the US presidential election. In January-March 2021, China increased its imports of Iranian oil to almost 800,000 bpd in January and almost one million bpd in March, although imports dropped again in April of that year. 

In 2021, Iran and the US began indirect talks meant to bring both countries back into full compliance with the 2015 nuclear deal. Iranian exports rose during 2022, ending the year above one million bpd. Historically, Iran's oil production had reached all-time highs in the 1970s with a peak of 6.02 million bpd in 1974, according to OPEC data. That amounted to over 10 per cent of world output at the time.

What next for crude oil prices?

Despite holding around 12 per cent of the world's proven global oil reserves, Iran is unlikely to raise its production much further and reach its geologic potential, said analysts, particularly if Tehran's geopolitical relations become further entangled in the Israel-Hamas war.

According to S&P Global Commodity Insights, the continuing spate of attacks by Yemen's Houthi militia on Red Sea shipping, and the potential expansion of the Israel-Hamas war into Lebanon, threaten to embroil Iran, raising the risk that Western countries will intensify sanctions pressure on Tehran.

Also Read: Oil traders stay bullish as Brent hovers at $90: ‘Crude to stay elevated even if Middle-East tensions cool down’

Iran has said it is targeting crude production capacity of 5.7 million bpd by 2031. This is roughly double its 2023 average of 2.82 million bpd, according to the Platts OPEC+ survey by S&P Global. Reaching that would be highly ambitious even without sanctions, which have canceled Iran's ability to attract investment and technology, according to S&P Global Commodity Insights.

“We estimate that oil prices already reflect a $5-to-$10-a-barrel risk premium from downside risks to supply," before the weekend attacks by Iran, said analysts at Goldman Group Sachs Inc. The potential Israeli response to Iran’s attack is highly uncertain and will likely determine the extent of threat to regional oil supply, according to Goldman Sachs.

Analysts made it clear that the response from Israel’s government to Iran’s attack will determine whether the situation leads to a wider war, or whether the risks of escalation will fade away. The market’s worst-case scenario is a closure of the Strait of Hormuz, although that outcome seems unlikely, they added. 

Before the Iranian assaults, oil prices already reflected a $5–$10 per barrel risk premium from downside risks to supply. ‘’A higher geopolitical risk premium may result if the market priced a greater likelihood of decreased Iran supply. While geopolitical tensions can cause price spikes in the short term, the long-term outlook suggests a possible slight decrease due to increased production,'' said Amit Goel, Co-Founder & Chief Global Strategist, Pace 360.

​Disclaimer: The views and recommendations made above are those of individual analysts or broking companies, and not of Mint. We advise investors to check with certified experts before making any investment decisions.

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ABOUT THE AUTHOR
Nikita Prasad
Nikita covers business news and has been producing news on digital platforms since 2018. She writes on economy, policy, markets, commodities, industry. Her core areas of interests include infrastructure, energy, oil and gas, railways, and transport/mobility. She has worked for business news channels like Moneycontrol, NDTV Profit, and Financial Express in the past. If you have story ideas/pitches/reports or quotes/views to share, reach her at nikita.prasad@htdigital.in.
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Published: 16 Apr 2024, 07:13 PM IST
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