Will Iran’s oil revenues satisfy next year’s budget expectations?

TEHRAN, Jan. 23 (MAN) – Despite enjoying a great variety of income sources besides oil, Iran is undeniably dependent on oil revenues for managing its financial affairs. According to economists, near 70% of the Iranian government’s total income comes from selling oil and oil products.

So, considering the significance of oil in Iran’s macro-economic planning, every year in preparing the country’s budget bill the government administration meticulously analyzes the market dynamics to estimate an average oil price and also an amount for the country’s oil exports.

In the $405-billion national budget bill for the next Iranian calendar year 1398 (starts on March 21, 2019), which was presented to the Majlis by President Hassan Rouhani in December 2018, the estimated oil incomes stood at 1.425 quadrillion rials (about $34 billion), with the country’s oil exports expected to be 1.5 million barrels per day (bpd) and the oil prices estimated at $54 per barrels.

Clearly, even in case of oil prices staying at the channel of $54 throughout 2019, with 1.5 million bpd of oil exports still the expected $34 billion for the oil incomes in Iran’s next year budget will not be realized, this begs the question that “how well Iran’s oil revenues could satisfy next year’s budget expectations?”

Clearly, oil prices and oil exports are the main variables in Iran’s oil income equation. So in estimating the level of realization in the “oil share” of Iran’s next budget bill, what is important is assessing the factors which can affect these two variables.

The US sanctions

Currently, the most important factor which plays a significant role in determining the amount of Iran’s oil exports and consequently the outlook of the country’s oil revenues in 2019, is the impact of US anctions.

In May 2018, Donald Trump withdrew the US from an international deal with Iran, formally known as the Joint Comprehensive Plan of Action (JCPOA), and in November the sanctions were reimposed on the country’s oil sector.

Although shortly after the sanctions took effect, the US government granted exemptions to eight countries - China, India, Greece, Italy, Taiwan, Japan, Turkey, and South Korea - allowing them to temporarily continue buying Iranian oil, but the possible changes in the US policies toward Iran and the continuous slowdown in the global economy as a result of US-China trade war could create a less promising outlook for Iran’s oil market throughout 2019.

Some analysts believe that the United States is likely to extend waivers in May but will reduce the number of countries receiving them.

As New York Times quoted analysts at Eurasia Group, “China, India, Japan, South Korea, and Turkey are likely to be given waivers after they expire in May.”

This means Italy, Greece, and Taiwan will not be granted any more waivers.

So obviously, the US’s stand toward Iran is the main factor determining the extent to which the oil revenues could realize the country’s budget estimations.

Last year’s budget bill was planned based on an estimation of selling 2.5 million bpd of oil and byproducts at a price of $55 per barrel. The great reduction in the expected oil exports – 1.5m bpd - in the next year’s budget, however, clearly shows how the situation could unwind.

US-China trade war

Another factor which has had a drastic impact on the global oil markets in the last six months is the trade war between the US and China, a prolonged row which caused the oil prices to fall near 20% in Q4 of 2018.

Crude oil had a great start in 2018. The oil prices touched $80 per barrel for the first time in almost four years thanks to the Organization of Petroleum Exporting Countries (OPEC)’ decision to extend the oil production cuts until end of 2018.

However, as the trade war between the US and China got worse, crude oil was the first frontier to feel the pinch. Brent oil prices started declining since the beginning of July, thanks to the implementation of the US tariffs on several billions of dollars worth of Chinese goods.

Now, nearly six months after the first signs of the trade war started to show in the oil market, still the concerns over the future of oil demand and a global economic slowdown are haunting the oil prices.

In its latest World Economic Outlook, the International Monetary Fund (IMF) cut its forecast for average oil prices to just below $60 per barrel in 2019 from close to $70 in its October edition.

Reuters said on Monday that “China this week reported its lowest economic growth figure since 1990, with GDP rising by 6.6% in 2018.”

Most economists and market analysts believe that slowing manufacturing activity in China will negatively impact the demand and consequently the oil prices in 2019.

With oil prices at their current $62, Iran’s budget expectations are to some extent satisfied, but is it going to stay like this for the rest of 2019?

OPEC+ cuts

Earlier in July 2018, under pressure from the US for reducing the oil prices, Saudi Arabia decided to increase its oil production to a record high.

Following this decision and with Russia and some other OPEC nations like Iraq and Libya also increasing their output and of course with the surge in US shale output, suddenly the market was overflown by oil and the stable market which was the result of a long-lasting deal between OPEC and non-OPEC members once again fell into chaos.

The reduction of global demand as a result of the trade war between the US and China added to the severity of the situation and warning bells started to ring across the global oil market.

As a result, later in December despite opposition from US President Donald Trump, headed by Saudi Arabia and Russia once again major oil producers agreed to cut oil production and rebalance the market.

In a meeting in Vienna, the OPEC+ decided to take 1.2 million barrels per day off the market for the first six months of 2019.

Although as an immediate response to the deal, oil prices rapidly recovered from an under-fifty ceiling, however, the OPEC+ announcement didn’t result the expected upward impact on the oil market.

The recent news regarding a gloomy global economic outlook has also spread a sense of skepticism throughout the oil market and the support from supply cuts that started in late 2018 by OPEC+ doesn’t seem to be enough to withhold the darkening impact of dimming demand.

Considering all the above-mentioned factors which could individually or together impact Iran’s oil revenues in the upcoming fiscal year, it is hard to have any absolute view about the Iranian oil incomes in 2019.

However, what is clear is that Iran’s oil exports are expected to rise in the upcoming months since the country’s Asian buyers are stepping up their intakes. And with the prices at the current $62, one can say that the current situation is standing exactly at the threshold of Iranian budget bill expectations.

So, fingers crossed for a better situation or permanence of the current dynamics.

MNA/TT

News Code 141809

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