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Could Iran’s Production Restart Set Back Oil Prices To $35?

Whatever negotiators come up with in the talks with Iran over its nuclear program, a consensus seems developing that any lifting of sanctions would mean a further drop in the price of oil.

Already Iran’s deputy oil minister, Mansour Moazami, has said he expects his country’s crude oil exports will nearly double eventually from 1.2 million barrels per day to 2.3 million barrels when and if the sanctions are removed.

And while Tehran has urged fellow OPEC members to reduce output accordingly for the sake of price stability, the cartel collectively exceeds its own self-imposed ceiling of 30 million barrels of crude per day by over 1 million barrels.

Sergei Smirnov, who studies energy at the Kazakh Institute of Political Solutions, said a removal of the sanctions would have a quick effect on the price of oil – first a drop, then a gradual rise. “The prices will immediately fall as soon as the decision on lifting of sanctions is made, no matter whether Iran will supply the raw materials to the market or not,” he said.

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“If the sanctions are lifted from such a large producer of oil as Iran, the market will definitely react,” Smirnov said, but added, “Later, the prices will likely to start restoring and react on the oil volumes, to be supplied by Iran to the world market.”

Smirnov acknowledged that there is now no solid intelligence about the state of Iran’s oil fields and Tehran’s technical ability to restore production to pre-sanction volumes. Therefore, he said, “[I]t is difficult to predict the duration of oil price fall, although there is the information that Iran has considerable oil reserves in the storage tanks.”

This theory jibes with that of Gary Hufbauer of the Peterson Institute for International Relations, an economics think tank in Washington. He said adding even more crude to the market would bring down the average global price of oil from the current level of between $50 and $60 per barrel to $35 per barrel.

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Within a few months after a lifting of sanctions, Hufbauer said, Iran could increase output by a half-million barrels per day. That initial amount, while a small fraction of the 90 million barrels of oil needed each day around the world, still would be enough to push down oil prices because of the current glut.

Hufbauer’s only optimistic comment on a lifting of the sanctions is that many foreign oil companies have left Iran because of the sanctions, denying it the Western technology necessary to keep its oil industry up to modern standards, slowing any efforts by Tehran to ramp up production as quickly as Moazami forecast.

Jacob Lew, the U.S. Treasury secretary, agreed, dismissing as a “myth” the idea that Iran’s economy could somehow “instantly recover” from the sanctions, because the measures have cost Tehran “over $160 billion” in oil revenue since 2012.

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As a result, he said, Iran’s gross domestic product shrank 9 percent between March 2012 and March 2014, leaving it “15 to 20 percent smaller” than it would have been without the sanctions.

Iran has been negotiating in Vienna about the future of its nuclear program with Britain, China, France, Russia and the United States – the five permanent members of the U.N. Security Council – along with Germany. Tehran says the research is for peaceful nuclear power, but some Western states fear it may be working on a bomb.

By Andy Tully Of Oilprice.com

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  • Roland on July 15 2015 said:
    Iran has been selling its heavy crude to properly-equipped refineries in India, China, & SKorea that can handle it. But it's also high-sulfur. Nasty stuff. There's no oil shortage, so why would a refinery gear up to handle it?
  • JFH on July 14 2015 said:
    WTI dropped 2% this morning after announcement of the "deal".
  • Name on July 14 2015 said:
    The oil price went up right after the deal.

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