COMMODITIES 2025: Iran’s oil fortunes take a hit from geopolitics

This is part of the COMMODITIES 2025 series where our reporters bring to you key themes that will drive commodities markets in 2025.

Iran has seen a sizeable increase in its crude output since 2022 when Russia invaded Ukraine and Western governments shifted their sanctions focus away from Tehran.

But the election victory of Donald Trump as the US president, as well as ongoing conflict in the Middle East, will likely see Iranian oil growth stall and threaten the country's plans to increase its production capacity, analysts say.

Iran, which pumped 3.22 million b/d of crude in November, according to the Platts OPEC+ survey by S&P Global Commodity Insights, is aiming to raise its production capacity by 200,000 b/d by March and 400,000 b/d further in the following Iranian year.

Western companies have long withdrawn from Iran, leaving it dependent on financing from China and Russia to maintain its aging infrastructure and fund new drilling.

Trump's expected maximum-pressure campaign could tighten Iran's upstream access to foreign capital further, though analysts do not expect as drastic of a drop in Iranian production as when the US withdrew from the nuclear deal and reimposed sanctions in 2019, during Trump's first term in office.

Following Trump's election, analysts with Commodity Insights cut forecasts for Iranian production in 2025 by an average of 150,000 b/d.

"We do not expect Trump sanctions to have the same impact as they did in 2018-19 when Iranian crude oil production fell from 3.8 million b/d to 2.1 million b/d," they said in a recent note.

Frankfurt-based energy analyst Abdollah Babakhani said it would be hard for Trump to impose sanctions on all of Iran's oil sector.

"He could possibly impose sanctions on part of Iran's oil because China and to some extent Persian Gulf countries will not cooperate with Trump that much. He could sanction one-third of Iran's oil or half of Iran's oil, tops," Babakhani said.

Iran, for its part, said its capacity expansion targets are still achievable in the face of tighter sanctions, with oil minister Mohsen Paknejad saying Dec. 8 that its plans remain on course.

"The increase of Iran's oil production capacity has nothing to do with sanctions. We will have this capacity," he said.

Shana reported that the capacity stood at 3.56 million b/d on Aug. 21, and had risen to 3.62 million b/d by December.

Iran's options include the Azadegan oil field, where maintenance could result in capacity growing by almost 30% to 200,000 b/d over the next year, officials have said.

Successful development of the second phase of Azadegan could increase output from 400,000 b/d to 600,000 b/d in the next Iranian year.

"Right now, Iran is almost producing at the capacity it has. It has no free capacity but it can generate capacity, something close to 200,000 b/d to 250,000 b/d by the end of the next spring. And maybe nearly 150,000 b/d to 200,000 b/d will be added to its production volume by the end of the next [Iranian] year. There is no capacity over this to add in the oil sector," Babakhani said.

In recent months producers at the Karun, Aghajari, and Gachsaran fields have also reported some output increases.

NIOC CEO Hamid Bavard said Dec. 19 that oil production was up between 70,000-100,000 b/d over the past three months.

But Iran could also be limited by insufficient gas for injection into oil fields to boost output, with the country facing chronic gas shortages.

Syria impact

In the meantime, sanctions have cut off many supply options for Iran, hitting oil revenues, as well as output.

Already, Iran has lost one supply outlet, following the fall of Syrian President Bashar al-Assad.

Iran – a key backer of Assad – had been shipping around 50,000 b/d of oil to Syria. Tanker tracking data showed that these deliveries were halted after Assad's exit and it is unclear if they will resume under the new government.

Iran's flagship crude grade is Iranian Light, a medium sour grade that accounts for roughly half of the country's production, averaging about 1.5 million b/d in 2022, according to the Platts Periodic Table of Crude by Commodity Insights. Other major export grades include Iranian Heavy and South Pars condensate.

Iran is hampered by the fact that the vast majority of its oil is sold at discounts to China, due to sanctions, leaving it with little leverage. Hojatollah Mirzaee, head of the research center of Iran's Chamber of Commerce, estimates that Iranian crudes are discounted by about 30% from market prices, and sanctions also add additional insurance costs and risk factors.

"Right now, we send 92% of our oil to China," Mirzaee said. "This is while in the past we used to have a diverse market of 10 customers with at least more than 2 million b/d [in exports]," Mirzaee told the Etemad newspaper Nov 27.

Iranian officials said that these supplies remain stable.

"It was rumored that China will buy less oil from Iran in the future. It was all a lie. Both oil production and investment are increasing," Central Bank head Mohammadreza Farzin said Dec. 18.

Vandana Hari, CEO of consultancy Vanda Insights, said Trump may wield the potential of ratcheted sanctions to force Iran to the negotiating table on wider geopolitical issues in the Middle East.

"On the Iran front, the threat of stricter oil sanctions might be dangled and it may even be implemented, but we need to bear in mind that it will be the means to an end, which will be negotiating with Tehran on the Israel issue as well as its nuclear program," Hari said.