Increased Iranian Output Capability and Venezuelan Woes Could Obliterate or Aid Saudi Claim of Market Rebalance

The new week began on a familiar note, with Saudi Arabia on Monday claiming that the Organization of the Petroleum Exporting Countries (OPEC) crude cutbacks have helped rebalance the market, and reports strongly suggesting that any rebalance could be obliterated - this time in the form of Iran bragging that it is able to boost production by 3 million barrels per day (bpd).

And even though Iran has made the claim before, it comes on the heels of the re-election of president Hassan Rouhani, which is widely seen as a major benefit in attracting all-important foreign investment to the Islamic republic.

Khalid al-Falih, energy minister for the Saudis, told an audience in Baghdad that the OPEC-led oil reduction deal has helped balance the market and aided an industry recovery, albeit not a complete one; he made the remarks before heading to Vienna, where OPEC will meet on May 25 to decide whether to extend the cuts into next year.

Despite al-Falih's rhetoric, most analysts regard the initial six-month cutback as a disappointment, failing neither to slow overall global production or alleviate global stockpiles.

As al-Falih was singing the cutback's praises, Gholamreza Manouchehri, deputy head of the National Iranian Oil Company, told state news agency IRNA that "Based on plans and proposals received from international companies, Iran has the potential to increase oil production by 3 million bpd," but he did not specify when the increase could happen.

If Hassan Rouhani's re-election is anything to put stock in, the increases could happen sooner than later: Ghanem Nuseibeh, founder of Cornerstone Global Associates, told BloombergMarkets, "Rouhani will do one of two things: either wait and see what [U.S. president] Trump does, or he'll say, 'Let's move ahead.' I'd advise him to go ahead."

Iran was waiting until after the May 20 election to hold its first international auction of oil-development rights, and "the fact that Rouhani won as a reformist who delivered the nuclear deal and promised to bring in foreign investment would suggest that there is support for things like the oil contracts," according to Patrick Murphy, a partner at law firm Clyde & Co.

However, it's anyone's guess how successful Iran will be on the international stage, given that Trump is currently trying to develop a coalition of Middle Eastern states to oppose the nation on the grounds it "funds arms and trains terrorists, militias, and other extremest groups."

In fact, other news on Monday suggests that the Saudi claim of a rebalanced market could actually come closer to being achieved: not through OPEC's cutbacks, but by Venezuela's oil production being on the brink of collapse.

Oil Price reports that violent protests continue to paralyze the country and its inflation rate will swell to 720 percent this year; "As far as the oil sector goes, the best case scenario for Venezuela is steady, if rapid, decline in production – a loss of 200,000 to 300,000 bpd this year."

Helima Croft, commodities strategist at RBC Capital Markets, recently wrote of Venezuela, "The oil question is whether current conditions could set the stage for the type of industrial action that cut exports by nearly 80 percent in the early 2000s."

Meanwhile, the latest information about global stockpiles was provided last week by the International Energy Agency, which calculates that inventories in industrialized nations totaled 3.025 billion barrels at the end of March - about 300 million barrels above the five-year average.