Iranian Oil to Fuel Further Price Drop?

As part of the intensely negotiated nuclear agreement with Iran announced on July 14, Western financial and economic sanctions in place since 2011, including an oil embargo imposed on Iran by the US and the European Union, will be lifted. With a deal, known as the Joint Comprehensive Plan of Action (JCPOA), in the rearview mirror, observers are questioning the return of Iranian oil to the world market: When will it happen, and how much will it be?

When: Gradual return anticipated

Iran’s current production levels of 2.9 million barrels a day is below pre-sanction levels by between 800,000 to a million barrels a day.1 I disagree with the suggestion that Iran can return production to pre-sanction levels within months of rescission of the sanctions. In fact, before the agreement actually takes effect, various international government bodies and political entities must review it, inspection and verification of Iran’s nuclear capacities must be completed, and, finally, the United Nations Security Council must adopt the plan. As a result, I anticipate that the market won’t feel the impact of Iranian oil sales until 2016. And the market appears to concur — West Texas Intermediate (WTI) crude rose 2.5% to $53.04 a barrel on Tuesday after an initial drop of 2.5% when the agreement was announced.2

How much: Muted impact

Despite the wide range of numbers circulating, a reasonable expectation, in our view, is for Iranian exports to recover by about an additional 500,000 barrels per day over the next year at most for these reasons:

  • Iran’s heavy underlying mature field decline.
  • Growing domestic oil consumption.
  • The likelihood that sanctions will be suspended slowly rather than terminated all at once.

Consensus estimates are that Iran has between 30 million and 50 million barrels of oil in floating storage. Some of this could potentially come to market at the end of this year, putting some pressure on the crude market, but I don’t foresee $10- to $20-a-barrel impact.

Industry outlook

In total, the cumulative capacity of major project volumes that have been deferred or canceled is now approaching a shocking six million barrels a day. Only a few US companies have discussed small-rig-count additions if WTI were rise to $65 per barrel, a far cry from today’s $51.68.3 Otherwise, I expect these companies will have to continue to reduce investment in 2016 if oil prices remain depressed. All of this volatility sets the stage for a recovery, but it takes time.

So while Iran’s re-entry into the world oil market could temper the ultimate recovery of oil prices, I’ve never anticipated a return to $90 to $100 a barrel. But my thesis that companies need a price of $75 a barrel to justify making new investments remains intact.

1 Source: Energy Information Agency, July 2015

2 Source: Bloomberg L.P., July 14, 2015

3 Source: Bloomberg L.P., July 15, 2015

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