With the removal of sanctions on Iranian crude exports underway, the bearish price trend may continue through the end of the year, increasing the intensity of competition between oil exporters on a global scale.
The preliminary agreement on lifting sanctions 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 U.S. a barrel on New York Mercantile Exchange due to concerns over the global oil supply glut and staggering level of global demand shaken by slowdown in Chinese and Asian markets. Such low oil price level was reached last on March 4, 2009.
The cumulative U.S. and leading OPEC countries’ crude production output reached three year highs by the end of last month of July: U.S. (9.5 Mbd), Saudi Arabia (10.36 Mbd), Iraq (4.07 Mbd), Iran (2.86 Mbd).
Since Iran agreed to a range of measures that should prevent the country from developing a nuclear bomb in return for the removal of sanctions last month, crude prices have tanked.
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.” Related: An Oil Price Spike Could Be Nearer Than You Think
What implications do the current agreement with Iran and the increasing global oversupply of crude have on leading OPEC producers?
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 6 months after the approval of the deal by the U.S. and Iran (which itself takes 3 months from signing), but the return of ~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,” stated Mills to Oilprice.com
The Iranian deputy oil minister for commerce and international affairs, Hossein Zamaninia, said Tehran had identified nearly 50 oil and gas projects worth $185 billion that it hoped to sign by 2020. Many European companies have already expressed interest in reestablishing business in Iran, and Germany sent its economy minister Sigmar Gabriel along with a delegation of businesspeople on the first top-level government visit to Tehran in 13 years, following the announcement of the agreement on lifting the sanctions.
While Iran has numerous undeveloped or under-developed oil fields ranging from medium-sized fields up to giants, it will take years to bring many of them online. Related: A Key Tool For Energy Investors
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 Mbd in 2016 (3.38 Mbd of crude oil) as sanctions are lifted. Iran’s mature oil-field require large enhanced oil recovery efforts,” said Roa 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 Arabia’s response
Having adopted the strategy to strangle the U.S. shale industry by not cutting the OPEC production output, Saudi Arabia might have misjudged the resilience of the U.S. fracking industry economy 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."
The plunge in oil prices, down from $115 per barrel in June 2014 has already made Saudi Arabia feel the crunch. The country 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 in order to compensate lavish government spending. The future Saudi strategy on crude production may depend on its short-term and long-term assessment of geopolitical and economic developments in the OPEC countries of the Middle East.
"If production from non-OPEC slows down as expected and at 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 Gulf OPEC delegate told Reuters in Dubai last month. Related: More Rotten News For The Commodities Markets
As Robin Mills of Manaar Energy shared with Oilprice.com, 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, given the countries’ political rivalry. 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,” Mills summarized.
Consequences for Iraq
The collapse in oil prices has oil-producing countries scrambling to compensate the loss of revenues by increasing production. More Iranian oil, for example, will put a strain on Iraq. In response, both could try to continue to boost output to take in more revenue.
According to Roa Ibrahim, Iraq needs to speed up the required export infrastructure in the country for more reliable quality and quantity of its crude exports, such as completion of the strategic pipeline from the southern fields to Haditha.
“Iraq will probably be importing Iranian gas to Basra by end of 2015 and our estimated volumes exported to Iraq are 2.4 to 9.1 BCM/annum (the project was delayed due to ISIS attacks in the Iraqi province of Diyala). The other primary gas export market for Iran would be Turkey. The gas export markets are closely tied with political relations. If Iran were to export gas to GCC countries (notably UAE, Kuwait and Bahrain), it will require an improvement in political relations to go ahead,” stressed the energy consultant of Al Manaar.
By Ekaterina Pokrovskaya For Oilprice.com
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