Iran, Japan Can Stop Crude Price Rally

Iran, Japan Can Stop Crude Price RallyIran, Japan Can Stop Crude Price Rally

In the presence of sluggish demand and a persisting supply glut, global oil markets are likely to face continuous downward price pressure from decreased demand and additional supply coming from two countries: Iran and Japan.

Iran’s pledge to return to the pre-2012 sanctions export levels of 4 million barrels a day by adding a million barrels of oil production is certainly going to exert further downward pressure on prices, Oil Price reported. Iran could be producing between 3.3 and 2.9 million barrels a day now. Those estimating that Iran is producing on the lower end of the gamut of estimates also share the view that Iran will only be able to produce between 300,000-400,000 additional barrels per day.

Iran was producing 4 million barrels as recently as 2012 and the National Iranian Oil Company will be able to do all that's necessary with oilfield equipment and expertise from Europe.

Hence, there is a chance of Iran being able to produce a million additional barrels by the end of the year. Whether or not they succeed might depend more on economics and consensus from within its own ranks than technology and practice.

It is also beneficial to remember that Iran can sell oil that is currently in storage to claim market share in the near term while it improves its domestic output.

In addition, Iran has millions of barrels of oil stored in its oil tankers. Windward LLC, a firm that uses big data to track global oil production, estimated that Iran has about 47 million barrels floating in the Persian Gulf as of the end of January 2016.

Iran might have more than 47 million barrels in the Persian Gulf due to a greater capacity and the possibility of current storage underestimation.

  Japanese Demand

According to the US Energy Information Association, Japan is the third-largest consumer of oil on the planet, consuming an estimated 4.3 million barrels of oil per day in 2014.

Since virtually all oil consumed in Japan is imported, it is very telling about Japan’s recent relationship with oil that since 1997 imports have dropped from roughly 1.7 million to 1.2 million barrels per day.

Most of Japan’s imported oil is consumed in the transportation (41%) and industrial (29%) sectors. The decline in oil consumption and imports stems from structural factors, including a notable seasonally-adjusted decrease in industrial production of 3.5% from 2010 to December 2015.

The downtrend in oil imports abated somewhat after the 2011 Great East Japan Earthquake and tsunami, with Japan’s oil consumption rising for the first time in almost two decades by 255,000 barrels a day in 2012 from 2011.

This spike was short-lived though, as by 2013 Japan had shifted toward LNG, coal and energy efficiency measures. But LNG consumption is also declining, recent numbers suggest a 3.9% LNG import drop from 2014 to 2015.

The downward pressure on oil and wavering LNG demand from the electricity sector will likely continue, as Japan has plans to gradually turn more and more reactors back online. In August and October of 2015, two reactors in the southern prefecture of Kagoshima operated by Kyushu Electric Power were restarted, ending the two-year moratorium on nuclear power generation.

When you combine Japan’s declining population, lower levels of industrial production and government-mandated energy efficiency targets with the fuel shifts discussed, there is a very convincing argument to be made that the Japanese market will continue to be a decreasing consumer of petroleum products and will likely not provide consumption increases, nor price support, for oil or LNG.

In the mid-term, it looks like both Iran and Japan are likely to drive the oil markets further from an equilibrium situation. Even though the demand for oil products is up in the US and cracks in worldwide crude supply are showing, it will still take at least a year for oil markets to start balancing out.