Signed, Sealed, And Better Be Delivered

Fears of a detonation of oil prices following a deal on Iran’s nuclear future were thankfully not realised this week.

It has nearly 10% of global oil reserves and 18% of natural gas reserves, and at its height had output of anywhere between 5m – 6m bpd of oil. It also has as much as 40m barrels of crude sitting on board vast supertankers at sea – almost half of what the world uses in a single day!

So before the ink had fully dried in Vienna on Tuesday the eyes of the industry swung to computer screens and commodity prices. But initial drops of 2% were halted and reversed once it became apparent that despite the lifting of the 20-year long sanctions on oil exports, Iran is unlikely to be able to deliver full capacity for several months – and even then only after strict conditions are adhered to.

Exports from Iran had been reduced by almost 50%, to just over 1m bpd as a result of the sanctions. Since then of course we have seen OPEC tighten its grip of the market by flooding supplies in a bid to push out expensive US shale oil producers. There is a current oversupply of around 2.5m bpd.

Some analysts had feared the nuclear deal would immediately see Iranian oil enter the market at its previous volume and create a new price war, devastating the fragile recovery of prices which a year on sits in the mid-$50s compared to the giddy heights of over $110 in July 2014.

However Reuters carried out a survey of 25 oil analysts and most felt Tehran will only be able to increase its crude exports by 60% within a year. That was backed up by Energy Aspects, the London based consultancy firm whose chief oil analyst Amrita Sen said, “Oil from Iran will take time to return and will not be before next year, most likely the second half of 2016.”

In addition OPEC is unlikely to permit Iran to rush headlong into the market and drive down prices. SEB Markets chief analysts Bjarne Schieldrop said, “There is no reason to drive the oil price substantially below $60 per barrel. OPEC will manage total volume of oil into the global market.”

Before anything happens the world powers involved in the deal with Iran will need to be satisfied that Tehran is modifying nuclear equipment, dismantling centrifuges and allowing detailed inspection that could mean months of red tape and box ticking.

Nevertheless Iran’s Oil Minister Bijan Zanganeh is confident the country can reach full capacity quickly. Last month he said in the event of a deal being signed it would increase by 400,000 barrels almost instantly and by 600,000 in six months. There has been widespread interest in the financial potential for sanction easement, with Sarosh Zaiwalla, a London-based lawyer specialising in sanctions, reporting to the BBC that there was huge excitement despite the possibility of problems ahead. “Foreign trade and investment will allow Iran to make huge efficiencies and drive down the cost of production.” This is crucial. Andrew Slaughter from the Deloitte Centre for Energy Solutions said, “It is not just a matter of turning on the taps again. They will need some investments and technology.”

There is disagreement over the impact a delayed increase in the market would have. Some say even a modest initial increase in output will impact on prices, and further on the investment plans of companies already reeling from the low prices seen over the past twelve months. Sen said, “the mere prospect of new oil will be bearish for sentiment.” But production in many countries is decreasing and demand has been on the up according to Gary Ross executive chair of Pira Energy Group. As a result he said, “With each day the market will be in a better position to accommodate the incremental Iranian oil.”

It’s fair to assume there are intense discussions taking place in Saudi Arabia this week. It is of course the dominant voice in OPEC but with such vast reserves and interest from foreign investment Iran would compete with it. Any infighting would inevitably impact on everyone. As Commerzbank warned, “If OPEC fails to offset this additional supply by cutting output elsewhere the oversupply on the global oil market will remain in place next year too. Saudi Arabia is certainly unlikely to be willing to make space for its ‘arch enemy’ Iran.”