Iran unrest sparks price volatility
The article below appeared in the 3 January 2018 edition of Natural Gas Daily, published by Interfax Global Energy Services.
Civil unrest in Iran has led to at least 21 deaths, and violent clashes between security forces and protesters that began in the northeastern city of Mashhad on 28 December have spread. Although the Iranian unrest initially focused on economic grievances, the religious establishment and security forces have subsequently been targeted by protesters.
Iran’s supreme leader Ali Khamenei, who despite being a cleric has de facto control of the army, accused the country’s enemies of causing the troubles, alleging that they had used “cash, weapons, politics and the intelligence services” to fan discontent.
The unrest has led to speculation that the United States may press to impose sanctions on Iran again. US and EU sanctions were lifted in July 2015 after the five permanent members of the UN Security Council and Germany, known as the G5+1, reached a deal with Iran on its nuclear programme. Iran and the joint commission of the G5+1 reiterated their commitment to the agreement, which former US President Barack Obama saw as his key foreign policy success, in December 2017.
However, current US President Donald Trump has repeatedly threatened to go back on the deal, and in a series of recent messages on Twitter blamed Iran’s leadership for the latest unrest. Calling the Iranian regime “brutal and corrupt”, he tweeted: “The people have little food, big inflation and no human rights. The US is watching.” Trump also alleged that “all of the money that President Obama so foolishly gave [Iran]” had either gone into the pockets of those in government or had been used to fund terrorism.
Oil prices settled close to a 30-month high on the first trading day of 2018. North Sea Brent crude oil futures hit a peak of $67.29 per barrel on 2 January, a 2% gain from the previous close and exceeding the 2017 high of $67.10/bbl reached on 26 December. The front-month contract closed at $66.24/bbl.
Iran is a major oil and gas producer, with the world’s fourth-largest proven crude oil reserves and the second-largest proven gas reserves. There is no sign yet that the troubles have affected oil and gas production, but if this were to happen it would have a major impact on the markets, as would the return of sanctions.
The sanctions imposed by the US and the EU in 2011 and 2012 had a profound effect on Iran’s energy sector. They caused a drop of around 1 million barrels per day (MMb/d) in Iran’s crude oil and condensate exports as European companies were banned from buying Iranian oil and a number of Asian refiners also cut their offtake. The sanctions also affected upstream investment in oil and gas projects, causing project cancellations and delays in implementing the planned 24-phase development of the South Pars expansion project.
Iran is OPEC’s third-biggest crude oil producer after Saudi Arabia and Iraq. Iran produced 3.9 MMb/d of crude oil in 2017, 2.1 MMb/d of which it exported. Iran’s crude oil production is currently around 720,000 b/d higher than it was in 2015 before US and EU sanctions were lifted. An estimated 62% of Iran’s crude oil exports went to Asia last year, while around 38% was sold to European refiners.
Iran is one of the world’s top five gas producers. It produced 202.4 billion cubic metres in 2016, up by 6.6% from 2015, according to BP Statistical Review of World Energy. But Iran consumes almost as much gas as it produces, so it is not a major exporter. BP estimates Iran’s consumption reached 200.8 bcm in 2016, up by around 5% from the previous year, while exports stood at 8.4 bcm – more than 90% of which went to Turkey.