Hilliard’s Weekend Notebook


Thoughts, views and opinions as current events unfold: With topics taken from current market events and my latest book — When the Bubble Bursts: Surviving the Canadian Real Estate Crash (Dundurn: March 2015)  and my first book Investment Traps and How to Avoid Them (1999) — this short piece will give you unique and valuable insights filtered by my thirty-six years’ experience as an investment professional.


 

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Crude oil production about to soar in Iran

Increased crude oil production in Iran threatens any potential new balance of demand and supply and opens up the possibility of a new round of excess supply.

Iran’s government believes that their oil industry can attract more than US$40 billion of new investment annually, allowing a large increase in oil production and renewed exports from one of the original OPEC members.

Will new Iranian production extend the glut in world oil markets?

Iranian leaders have stated publicly that a target of 5 million barrels per day is achievable. This would represent an increase of more than 1.5 million from recent production levels, which were curtailed by US-led sanctions.

In the 1970s Iran was the world’s second largest exporter of oil, producing about 6.6 million barrels/day at the 1976 peak, before the Revolution. This large country (formerly Persia) has reserves that would last more than 100 years, and can produce at low costs of production. China, Turkey and India have been active in Iran’s oil industry, investing large amounts of money over the past decade to cement future supply lines.

Given the enmity between Saudi Arabia, the world’s largest producer of oil and Iran, the likelihood of Iran accepting an order from OPEC or Russia (the world’s second largest producer) to freeze production is close to zero. Iran’s oil minister, Bihan Zangeneh, dismissed the idea of a production freeze as ‘a joke’ on February 23. Another meeting to discuss a freeze is slated for April but Iran is unlikely to change its view, as for decades Iran was unable to sell much oil and forced to curtail production. This restraint caused by sanctions goes all the way back to 1979.

The Iranian economy suffered and now Iranians feels justified in demanding the right to ‘make up for lost time’.

Source: U.S. Energy Information Administration

Iran is currently producing under 3 million barrels per day and will demand to be allowed to sell at least 4 million barrels. The country’s oil industry could easily ramp up production to 5 or 6 million barrels per day, about half of Saudi Arabia’s production. If no agreement can be reached, as is likely, Iran will press ahead with plans to ramp up exports.

A recent article published by the CBC and written by two oil industry veterans, Hamie Vredenburg and Tim Marchant highlighted the issues between Iran and Saudi Arabia. The divide is even greater because the two countries follow different branches of Islam —the Saudis the majority Sunni faction and the Iranians the minority — and are the populations are ethnically different. Iranians are Persian while Saudis are Arab. Saudis speak Arabic and the Iranians speak Farsi.

Iran’s population is much larger than the Saudis, about 80 million versus 29 million in Saudi Arabia.

The article concludes that the rivalry between the Saudis and the Iranians won’t result in oil production cutbacks. Albertans will have to innovate and cut costs to be able to compete in this new world of oil surplus. The higher cost producers will be hard pressed to beat the Saudis and the Iranians at delivering oil to the world markets, but that’s what they will have to do.

This isn’t what Albertans, Canadians and US-based shale oil producers want to hear but it’s the new reality. Middle-Eastern oil producers will keep the world oil market well-supplied for the near future.

Most North Americans have other options for innovative economic activity, especially in technology-related areas. It’s time to move on.

 

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Hilliard, The MacBeth Group team and their clients may trade in securities mentioned in this blog.

 

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