RIYADH: Post Iran nuclear deal, the fear premium is dwindling. Markets are softening. Yet, issues continue to confound. Would the event unleash a flood of oil into the markets? How would other members of the Organisation of the Petroleum Exporting Countries (Opec) react to the emerging threat?
The deal to lift sanctions against Iran could trigger a slide in prices and a major shake-up of the energy landscape, Ambrose Evans-Pritchard wrote. The accord should unlock 800,000 barrels per day (bpd) of global supply by next year in a market of 89 million, rising over time as the Iran’s oil industry comes back to life.
Anticipating a final deal, Tehran is already in touch with western oil majors. Oil minister Bijan Namdar Zanganeh had initial meetings with European companies and “indirectly” with US firms, inviting them back to Iran.
And most oil majors appear to be open to re-enter Iran. When asked if Total would return to Iran if sanctions were lifted, Christophe de Margerie, chief executive of the French energy group, replied: “Of course.”
Peter Voser, Shell’s outgoing chief executive, told an industry conference last month that Iran had “vast resources” of oil and gas and “in the longer term, [its] hydrocarbons will have to be developed to meet [rising world] demand.”
Iran’s nuclear deal with the West will make it easier, cheaper and less stressful to trade its oil.
“Based on this deal, Iran’s crude oil exports will not decline (further) and our customers will be able to purchase oil from Iran without any anxiety and they will not have to look for alternatives,” Ali Majedi, the Iranian deputy minister for international affairs and trading, told news service Shana.
“No new sanctions will be slapped on Iran’s oil industry in the coming six months and our customers can clinch term contracts with Iran instead of spot oil consignments purchased from National Iranian Oil Company.”
While no one expects much immediate impact on Iran’s exports from the interim deal, the accord also signals that the long-running nuclear dispute now has a good chance of being resolved.
“It’s a step, but it’s not like the end of a sanctions regime, not like it’s going to have a significant impact on the real balances of supply and demand for oil,” Ed Morse, the head of commodities research at Citigroup Inc., said.
Citigroup hence believes the Geneva deal should cut global oil prices by $13 over time, enough to depress Brent crude below $100 and US crude below $85. Goldman Sachs and Bank of America have both warned over recent days that crude prices will slide in 2014.
Although, it would be difficult for Iran to revive its oil output to former levels quickly even if international restrictions on its exports are lifted, yet several clauses including the suspension of associated insurance and services on Iran oil sales are expected to have some immediate impact on the oil markets.
Washington’s pledge not to pursue deeper cuts to Iran’s exports over the next six months and the prospect of some shipments getting EU insurance coverage comes as a welcome and rare immediate relief for Iran’s oil exports.
Kevin Book, Managing Director at ClearView Energy Partners in Washington, said the apparent easing on insurance could provide for an increase of 200,000 to 400,000 bpd in Iranian exports, particularly to Indian refiners.
India could buy more crude from Iran in the next four months. It intends to buy up to an average 220,000 barrels per day (bpd) of oil from Iran in the year ending March 31, Indian Oil Secretary Vivek Rae said last Wednesday.
However, analysts such as Christopher Helman are of the view that the deal has the potential to derail the US shale boom.
In the short term, the Iran deal will ease the political risk premium baked into oil prices. In the medium term a comprehensive deal could add 1 million or more barrels per day to the market. In the long-term a gush of Iranian oil could soften oil prices enough to kill the economics of America’s tight oil boom.
Can the US afford it? The answer would be interesting indeed.