Iran and the outlook for oil prices

Iranian oil policy should be unaffected by President's Ebrahim Raisi’s sudden death because Supreme Leader Ayatollah Ali Khamenei holds ultimate power.

| 8 min read

Chinese Gross Domestic Product (GDP) growth has been picking up and US economic growth has slowed whilst avoiding recession. All this points to more demand for oil and gas, and a continuing pressure on supplies. West Texas crude has been in a trading range of around $70-$90 for the last year.

We have long argued that this decade will see continued good demand for oil and gas despite the big moves towards decarbonisation, especially in Europe. The world is likely to be needing 100 million barrels a day (mbpd) or more of oil in 2030 as it has been needing recently. This year demand growth is expected to exceed 1 mbpd.

The International Energy Agency (IEA) forecasts a rise in output to 102.9 mbpd in 2024. This would be met by expansion of non-Opec production, with Opec cuts in output assumed to stay in place.

Opec has sacrificed 2.2 mbpd of output and accepted a lower market share. The US, Brazil, Guyana and Canada can probably meet all the increased demand this year as they continue to expand their output. We have set out before how US President Joe Biden has slowed the pace of US oil and gas increases after the pro-fossil-fuel stance of Donald Trump but has granted numerous new permits to allow further growth.

Iran is producing oil at around 3.2 mbpd and claims it can boost output more in the next few years. Libya and Venezuela remain very depressed at 1.16 mbpd and 0.86 mbpd as members of Opec. Total Opec+ production is around 48 mbpd, now under half total world output. Iran’s output has recovered from much of the damage done by President Trump’s sanctions announced in 2018.

Iran has found ways around the US impositions and is selling a lot of oil to China. Iran is accused of breaking sanctions by arranging ship-to-ship transfers of cargoes and by falsifying ship transponders and tracking devices. The parallel world economy – led by China, Russia, Iran and North Korea – has friends and trading partners around the world willing to assist in avoiding US-led banks and oil trading rules. Iran is not subject to production cuts by Opec as there is sympathy within Opec for the impact of US and Western sanctions against the country.

President Trump saw Iran as a threat to the West.

President Trump saw Iran as a threat to the West. He pulled out of the US/European Agreement with Iran called the Joint Comprehensive Plan of Action (JCPOA). He was sceptical it would stop Iran developing nuclear weapons in the future and pointed out it left Iran free to pursue their ballistic missile programme and their proxy Middle Eastern wars.

When President Biden came into office, he opened talks to try to rejuvenate the JCPOA. This adversely affected US relations with Saudi Arabia, the United Arab Emirates and Israel, which were Trump’s allies in the Middle East – united, in part, by their antipathy to Iran. When President Biden wanted some help from Opec in the form of fewer production cuts to ease the oil price, his requests were not well received.

The Biden talks with Iran were inconclusive. The Israeli response to the Hamas terror attacks led directly to Iran sending missiles against Israel and the US having to help Israel shoot down incoming Iranian weapons. Meanwhile, the tough sanctions Mr Trump imposed on Iranian oil and banks have proved more difficult to enforce as time passed, with Iran rebuilding its oil exports and finding new trading partners that circumvent the sanctions. The tightening stranglehold on Iran’s economy at the end of the last decade has found some respite with China, Russia and others helping Iran.

Iran’s theocracy

The government of Iran makes US politics look youthful. The Supreme Leader, Ali Khamanei, is an 85-year-old cleric. He has been Supreme Leader for 35 years, following an eight-year tenure as President of Iran. He is Head of State, Head of the Armed Forces, uses the Revolutionary Guards to enforce loyalty to himself and has considerable control over the executive government, media and legislature. His Guardian Council has influence over appointments to senior positions in the state.

Mr Khameini is widely said to have manipulated the factions and forces successfully, strengthened the powers of the Supreme Head and placed supporters in the key posts and organisations of the executive. He overcame the absence of achieving Ayatolloah status before becoming Supreme Head and gained the status despite some clerical objections once in office.

The death of the president has removed his likely preferred successor. There will now doubtless be further private discussions about who might emerge as the favoured person to take on the ultimate role on his death. Some think his son, 55-year-old Mojtaba Khameini is a front runner. He has played an important role in helping administer his father’s office. He is said to be well regarded by the Revolutionary Guards and the military. He has undertaken religious education whilst not gaining Ayatollah status.

The senior religious education of leading politicians in Iran is an important part of getting on in the establishment, with religious and judicial teaching overlapping with what would be deemed politics and government studies elsewhere. The Supreme Leader himself may veto this idea as nepotism and the hereditary principle has its hazards.

There are other various candidates who may be allowed to run now Khameini has allowed an election within the specified timetable. They include the Speaker of the Parliament, Mohammad Baghe Ghalibaf. Former President Rouhani has spoken out about the way he was rejected and kept out of office. It seems unlikely Khameini will want a more moderate more popular figure like him as President.

It is safest to assume a President will be found who does not change the current policies and attitudes of the Khameini regime, which remain strongly hostile to the US and Israel. The Guardian Council may allow two or more candidates but can choose one obvious front runner they want with suitably weak opposition. They did this successfully last time, but also had a big problem with turnout as many people resented the manipulation of choice in the candidates. From time to time, the public erupts into street protests about aspects of the regime, but so far have been put down with tough police action.

The outlook for oil

The Trump/Biden expansion of US oil and gas, and other non-Opec oil developments has reduced the role of Opec in world energy markets. The Opec+ group brings Russia’s large output into its planning, but this still leaves the group with less than half world output. It would require significant further cuts to Opec output to do much more than offset growth elsewhere. It seems likely oil will trade around the $70-$90 mark for West Texas Intermediate (WTI) crude, given the more positive background for demand as economies sustain around 3% world growth.

It would take a major supply disruption or an acceleration of growth to get oil back over the $100 plus of the Ukraine crisis. It would take much more rapid progress with renewable power and electricity taking over from fossil fuels, or a fall in world growth to return to something nearer Covid-lockdown prices.

Action within the more likely trading range will continue to be determined week by week by worries over wars, news of growth or slowdown and by policy changes on tax and output levels made by leading producer countries. The next event is the 54th OPEC Ministerial meeting on 1 June when it is likely it will renew the production cuts, currently running at 2.2 mbpd, with Saudi accepting 1 mbpd and Russia also accepting large voluntary reductions.

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Iran and the outlook for oil prices

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