Impact of Iran's Oil on Prices

Impact of Iran's  Oil on PricesImpact of Iran's  Oil on Prices

With the removal of sanctions on Iranian crude exports, the bearish price trend may continue through the end of the year and intensify competition between oil exporters on a global scale.

Since Iran agreed to a range of measures that curb the country's nuclear program in return for the removal of sanctions last month, crude prices have tanked, Oil Price reported.

The deal raised the prospect of more Iranian oil hitting the market, resulting in oil futures contracts’ prices hitting the lowest benchmark of a more than six-year lows on August 14. Light sweet crude slid to $41.35 a barrel on New York Mercantile Exchange. Such a low oil price level was reached last on March 4, 2009.

The cumulative US and leading OPEC countries’ crude production output reached three-year highs by the end of July: US (9.5 million bpd), Saudi Arabia (10.36 million bpd), Iraq (4.07 million bpd) and Iran (2.86 million bpd).

Fitch Ratings stated August 4 that a "re-test" of the $45-a-barrel low for the benchmark Brent crude oil price is inevitable in the near future, as supply prices continue to squeeze the market.

  Impact on Global Oil Prices

According to Robin Mills, head of consulting at Manaar Energy, the anticipation of the Iranian deal has already caused prices to fall and further falls will depend on the pace of the increase in Iranian exports.

“Iranian exports will increase somewhat ahead of the formal confirmation of lifting sanctions, about six months after the approval of the deal by the US and Iran (which itself takes three months from signing), but the return of approximately 1 million bpd of Iranian exports will depress prices by $5-10 per barrel. In the long term, growing production from Iran will help keep prices moderate,” Mills said.

According to Roa Ibrahim, a consultant at Manaar Energy Consulting & Project Management, Iran does have substantial potential to restore production to pre-sanctions levels and even to increase it further, given its best-practice reservoir management records and investment in new field developments by international companies.

“We forecast Iran’s oil, condensate and NGL production at 4.26 million bpd in 2016 (3.38 million bpd of crude oil) as sanctions are lifted. Iran’s mature oilfields require large enhanced oil recovery efforts,” said Ibrahim. The return of Iranian oil to the market could make oil even cheaper than the current lows of about $49.50 a barrel.

  Saudi Response

Having adopted the strategy to strangle the US shale industry by not cutting the OPEC production output, Saudi Arabia might have misjudged the resilience of the US fracking industry to withstand lower oil prices.

The recent Saudi Financial Stability Report published by the Saudi Arabian Monetary Agency stated: "It is becoming apparent that non-OPEC producers are not as responsive to low oil prices as had been thought, at least in the short run."

Saudi Arabia has already spent $65 billion of its reserves since the onset of oil price decline and plans to raise an additional $27 billion by issuing bonds around the end of this year to compensate lavish government spending.

"If production from non-OPEC slows down as expected and at the same time demand continues growing next year, assuming that Iraq doesn't increase big and Libya is not going to come back, then the market will absorb the Iranian oil," a senior OPEC delegate told Reuters in Dubai last month.

Mills said Saudi Arabia faces a difficult challenge in accommodating increased Iranian exports, without causing a price crash.

“We do not believe that Saudi Arabia will cut its production substantially to allow an increase from Iran. But the Saudis may be pursuing a strategy of high production for now to drive high-cost producers out of business and thus create more room in the market for OPEC producers,” he said.