Two oil pumpjacks in a snowy field

Has Oil Recovered From the Most Disruptive Event in Decades?

In the last year, the oil market has contended with a pandemic, pipeline cyberattack and significant Iranian election. Raymond James Energy Analyst Pavel Molchanov discusses how these inflection points have impacted the industry.

Listen to For What It's Worth on Apple Podcasts  Listen to For What It's Worth on Spotify

Recorded June 21, 2021. Hosted by Public Content Manager Paige Lenssen, CFA.

For additional insight on the impact of Iran’s election on the oil industry, see Molchanov’s pre-election analysis below.



Will Iran’s Presidential Election Drive Oil Prices Higher?

ECONOMY AND POLICY

June 16, 2021

The likely victory of a hardliner candidate could postpone the return of Iranian crude exports and deter foreign investment in Iran’s economy. Read more from Raymond James Energy Analyst Pavel Molchanov and Washington Policy Analyst Ed Mills.

We view Iran’s presidential election that will be held Friday, June 18 as the most important political milestone of 2021 for the global oil market. Here are the two key points, both of which point to higher oil prices:

  • The all-but-certain victory of a hardliner will likely slow down the nuclear talks – and, as an off-chance scenario, might even halt them. This would mean that U.S. secondary sanctions last longer, postponing the return of Iranian crude exports onto the global market.
  • Beyond the direct question of sanctions, the new leadership in Tehran is likely to have less of a focus on economic modernization vs. the past eight years under the moderate presidency of Hassan Rouhani. This carries read-through for Iran’s oil industry, suggesting less eventual growth in supply.

Hardliner Ebrahim Raisi favored to win the election

The final list of candidates – as approved by the Guardian Council – came out in late May, with five hardliners and two moderates. Based on the polling, the clear frontrunner in this contest is a hardliner: Ebrahim Raisi.

Raisi has four decades of experience in Iran’s judiciary, having risen to the post of chief justice. Whereas Iran’s parliament and presidency are elected, all of the judges are appointed, with the chief justice named directly by the Supreme Leader. As such, Raisi is firmly an establishment figure, as is true of all approved presidential candidates. He is well-known to be a conservative and authoritarian figure: a “principlist,” to use the more precise term. He ran in the 2017 election but lost to Rouhani.

Heading into this Friday’s election, Raisi has the highest name recognition among the seven candidates. While polling in Iran is always sparse, it indicates that he will get by far the most votes, though he might fall short of 50%-plus-1, which would result in a run-off. There is historical precedent in Iran for run-offs, though in 2013 and 2017 Rouhani won in the first round.

Nuclear talks may be paused

The election matters for the oil market because Iran is capable of producing somewhere between 1.5 and 2 million barrels per day (bpd) beyond its current run-rate of slightly more than 2 million bpd. The uncertainty around the amount of spare capacity is due to the near-total lack of transparency by the National Iranian Oil Company (NIOC). The NIOC’s official forecast, affirmed as recently as the week of June 7, is that production can reach 4 million bpd within 90 days of sanctions being lifted.

But regardless of what the precise amount is, all of the incremental volumes would be exported. As it stands, Iran’s oil exports are minimal, as Trump-era U.S. secondary sanctions continue to dissuade most international buyers. If and when a revised nuclear agreement can be signed, and those sanctions are lifted as a result, it will be only a matter of time before the new barrels come onto the market.

The essential question, in other words, is political rather than operational. Hence the importance of the E3+3 nuclear negotiations that have occurred both before and since President Biden softened the Trump-era policy of “maximum pressure” against Iran, albeit without any tangible sanctions relief thus far.

Iran’s next president – likely Raisi – will take office in August. That translates into a post-election transition period of two months. While in theory it would be possible to conclude the talks and get everything signed before Rouhani steps down, past experience shows that nuclear talks tend to move at a snail’s pace, even without political complications. And the election of a hardliner would likely cast a cloud over the talks, further slowing down the process.

The last time a hardline president was in charge – Mahmoud Ahmadinejad (2005-2013) – sanctions against Iran had been practically universal rather than solely enforced by the U.S. We doubt that Raisi will be as belligerent and strident as Ahmadinejad had been, but they are closer ideologically to each other than to Rouhani. Depending on what Raisi says after the election, and how his administration behaves in its early days, it’s even possible to envision a suspension of the talks altogether, though that would be a rather extreme scenario.

More statism would mean less foreign investment, including in oil

Even a hardliner such as Raisi would want a nuclear deal and sanctions relief, provided the terms are acceptable and do not involve excessive infringement on what Iran perceives to be its sovereign rights related to nuclear technology. Beyond the foreign policy aspect of this specific issue, however, there’s a broader question of how Iran should develop its economy. Because this is a domestic matter, it gets very little attention outside Iran. But Iran’s president has much more direct power over economic policy than foreign policy, creating an even starker difference between Rouhani and Raisi.

Rouhani has tried – admittedly, with rather limited success – to reopen the Iranian economy to the outside world, encouraging modernization and foreign investment. By contrast, Raisi is more of an economic nationalist. In 2017, while running against Rouhani, Raisi said, “I see the activation of a resistance economy as the only way to end poverty and deprivation in the country.” The term “resistance economy” is comparable to autarky, i.e. insulating domestic industries from international pressure and competition. Assuming that Raisi’s government will follow such a path, the result would be continuation of protectionism and lackluster foreign investment.

Iran has a more diversified economic base than many outsiders realize – it’s less of a petrostate than, say, Saudi Arabia – but the oil industry is obviously important and would continue to suffer from a lack of international capital and technology transfer. Even if sanctions were to disappear entirely, the willingness of international energy companies to invest in Iran would be a function of the commodity landscape as well as the economic terms offered by the new government. At a time when just about all of the world’s Big Oils are as capital-disciplined as they’ve ever been, Iran would need to provide sweeteners for any of them to accept the heightened risk of investing there. Raisi seems very unlikely to do that. As a result, Iran’s ability to expand oil production on an organic basis over the long run – beyond the immediate post-sanctions export recovery – would be substantially constrained.

All expressions of opinion reflect the judgment of Raymond James & Associates, Inc. and are subject to change. There is no assurance any of the trends mentioned will continue or that any of the forecasts mentioned will occur. Economic and market conditions are subject to change.