War and sanctions change balance of output in OPEC+ producers Russia, Iran, Venezuela

As the geopolitics of war continue to loom over the oil market, the outlook for three OPEC+ alliance members whose energy sectors have been hit by sanctions -- Russia, Iran and Venezuela -- are figured to evolve.

Russia has been the primary focus of Western sanctions since it invaded Ukraine in February 2022, reducing the appetites of the US and other major consumers of oil to put further economic pressure on Iran and Venezuela.

Over the last 18 months, output has risen in both Iran and Venezuela, which are exempt from quotas under the OPEC+ crude production agreement.

But as the Ukraine war drags on and the Israel-Hamas hostilities threaten to engulf the Middle East, the three countries face different key drivers of production up to the end of 2023.

For Russia, analysts see OPEC+ policy and any developments related to Russia's invasion of Ukraine that could trigger more sanctions as the main factors affecting its volumes.

For Venezuela, the US Treasury's recent decision to ease sanctions to foster goodwill towards a new presidential election is set to provide some uplift for its oil industry, although the country faces production constraints due to its deteriorating infrastructure.

For Iran, risks related to perceptions of its role in the war between Israel and Hamas could be decisive.

In the longer term, US elections in 2024 could impact sanctions policy and by extension production volumes in Russia, Iran and Venezuela.

Analysts at S&P Global Commodity Insights see incumbent US President Joe Biden prioritizing oil market stability in the run up to the US elections.

"I think he will do everything he can to assure low gasoline prices including plenty of crude oil," said Paul Tossetti, executive director in the crude oil marketing practice at S&P Global.

Oil demand trends in China, a major customer of Russian, Iranian and Venezuelan crudes, are also likely to impact the three countries' production volumes and output policy in coming months.

Russian declines

Russia, which regained its status as top OPEC+ producer now that Saudi Arabia instituted deep voluntary cuts to prop up the market, forecast a decline in crude and condensate output in 2023. Deputy Prime Minister Alexander Novak said Sept. 20 that current forecasts for the year are for 527 million mt, equivalent to around 10.58 million b/d, down from 535 million mt, equivalent to around 10.74 million b/d.

Russia's crude output fell after it invaded Ukraine due to a combination of Western buyers shunning Russian barrels and a government policy of production cuts aimed at boosting oil prices and reducing the discount on crude that it exports.

Analysts see Russian output remaining steady at current volumes up to the end of 2023, as it and its OPEC+ counterparts maintain production discipline to support prices. Russia said it will reduce crude exports by 300,000 b/d through the end of the year from the May-June average, in concert with 1 million b/d voluntary production cut by Saudi Arabia.

The outlook for 2024 is less clear with OPEC+ ministers set to discuss market conditions and production quotas at a meeting scheduled for Nov. 26.

Russian production stood at 9.43 million b/d in September, according to latest Platts OPEC+ survey by S&P Global Commodity Insights. This was down from 10.11 million b/d in February 2022 when it invaded Ukraine. Output fluctuated significantly since then, falling to as low as 9.14 million b/d in April 2022 and remaining below pre-war levels throughout the period.

Venezuelan sanctions relief

Venezuela's production prospects had a significant boost on sanctions relief announced by the US in mid-October.

On Oct. 18, the US Treasury announced the suspension of selected sanctions in return for political concessions, which included issuing a six-month license to temporarily authorize all transactions in the oil and gas sector.

Venezuela's ability to increase output is limited, however, according to a report by S&P Global Commodities at Sea analysts Yen Ling Song and Mark Esposito. This was due to issues sourcing diluent, infrastructure issues as well as a lack of investment and skilled labor.

S&P Global estimated that Venezuela could increase production capacity by roughly 100,000 b/d from current levels to around 850,000 b/d.

Much of Venezuela's extra heavy oil requires blending with lighter crudes, naphtha or other diluent, but US sanctions restricted the country's access to importing them. Beyond that, Venezuela's oil infrastructure has severely degraded from years of underinvestment.

"Since presidential elections will only take place in the latter half of next year, fresh investment and expanded production capacity in the oil sector will likely only materialize from 2025 once the US has determined the future of sanctions," it said.

Venezuelan output has already risen since Russia invaded Ukraine, from 680,000 b/d in February 2022 to 770,000 b/d in September, according to the S&P Global survey, with the US seen relaxing its enforcement of sanctions over that span in part to offset market dislocations from Moscow's invasion.

Iran uncertainty

Likewise, Iranian oil production has risen steadily in recent months, but geopolitical risks related to the war between Israel and Hamas are complicating forecasts.

S&P Global estimated Iranian oil output rose to 3.01 million b/d in September, its highest level since Russia invaded Ukraine. This was up from 2.56 million b/d in February 2022.

Iran is boosting output at existing fields through well maintenance.

The conflict has yet to impact Iranian production or exports, and the government continues to predict further production growth.

"In the beginning of this government (2021), oil production was 2.2 million b/d. But now it has reached more than 3.3 million b/d. By the end of the current year [March 2024], we will have newer records, too," Iranian oil minister Javad Owji said Oct. 13, as quoted by the ministry's news service Shana.

But Western officials warned of potential punitive actions should Iran be found complicit in Hamas' surprise Oct. 7 attack on Israel, or enters the war, which appears to be escalating to involve fighting with Hezbollah in southern Lebanon. Iran backed both Hamas and Hezbollah.

A tightening of US sanctions on Iran could cut off some of its recent production gains.

S&P Global estimated 500,000 b/d or more of Iranian oil exports are at risk, depending on the US reaction.

At any rate, analysts see Iran's ability to increase production as limited by ongoing commitment to some sanctions, uncertain Chinese demand and competition with Russia and Venezuela.

JP Morgan forecasts the US will likely continue to block Iran from finding new buyers of its crude, which will cap its crude production at around 3 million-3.3 million b/d.

"Therefore, we believe that the trajectory of Iranian supply growth will continue to be determined by market factors in China, restricted by export competition from Russia and Venezuela," it said in a note.

Nordic bank SEB estimated that production in Venezuela and Iran could increase by close to 800,000 b/d year on year in 2024, which could eat into the market share of OPEC kingpin Saudi Arabia.

"Production in Venezuela and Iran is on the rise and is set to rise further in the coming months and in 2024," Bjarne Schieldrop chief commodities analyst at SEB said.