RIYADH: The debate is on.

What is to be the impact of the Iran nuclear deal on crude markets?

It will weigh bearish on the markets — for that’s certain. Yet when and to what extent, is still to be ascertained. US National Security Adviser Susan Rice said if Tehran complied with the terms of the deal and sanctions were lifted in “many months,” new oil flows from Iran would not hit the market all at once, but were likely to reduce global oil prices at least for a period of time.

The deal would definitely weaken oil prices, but not just yet, Goldman Sachs underlined. In a note to clients, it emphasised, “the timeline of the various steps required to reach such sanction relief suggests that Iranian oil flows will continue to remain capped until 2016.”

The Paris-based International Energy Agency thinks Iran could raise production by between 600,000 and 800,000 barrels a day ‘within months’ of sanctions being lifted.

Early indications suggest the sanctions impacting oil sales will be lifted following a positive report from the IAEA may be as early as December 2015, the Boston-based Consulting House ESAI said in a memo on July 14.

Iranian crude oil hitting the market would have no “significant” effect on short-term prices but it would have an impact in the long run, Fadel Gheit, of Oppenheimer told CNBC. Iran would be able to raise crude oil output by 250,000 to 500,000 bpd by the end of this year and by up to 750,000 by mid-2016, a Reuters poll of 25 oil analysts forecast. With global output of 90 million barrels per day, the influx is “not really going to change it very much,” Gheit emphasised.

Meaningful volumes of Iranian crude will only hit markets in mid to late 2016, underlined Azlin Ahmad, crude oil editor at Argus Media. “After years of under investment and aging fields, Iran’s spare production capacity could be as little as around 200,000 barrels a day, although that could increase to 500,000 bpd by the end of 2016. It’s going to take some time for Iran to ramp up its production.”

Yet, even in the short term too, markets are wary of the millions of floating Iranian barrels. Iran is reported to have large volumes stored in supertankers — ready to be shipped at short notice. Estimates put the volume of floating barrels at around 35-40 million barrels.

“The impact of sanctions relief on Iran’s production would likely initially be a draw-down of floating storage and an increase in production of several thousand barrels per day,” Goldman analysts conceded.

While higher crude exports from Iran are expected by the first quarter of 2016, ‘there would be some leakage, between now and then, from the 35 million barrels of crude oil in floating storage,’ the ESAI July 14 memo too had emphasised.

And while the oil markets await a final decision on the impact of deal, perhaps the most important implication of the deal is, that, it sets the stage of an Opec Grand Bargain (for output quotas), late in 2016, cites ESAI.

Iran is clamouring to double its crude exports soon after sanctions are lifted and is pushing other members of the Organisation of the Petroleum Exporting Countries to renew the cartel’s quota system.

Iranian oil minister Bijan Zanganeh has been insisting for last several months that Iran could add a million barrels to daily oil output “within a few months” of sanctions lifting, underlining, it’s exports would reach 2.3 million bpd, compared to around 1.2 million bpd today.

For some all this pointed to pre-positioning for the looming, grand quota bargain within the Opec — some day — in not too distant a future.

In the meantime, with Saudi Arabia ramping up its output to 10.6m bpd in June, an increase of more than 200,000 bpd on the previous month, David Sheppard of Financial Times, referred last week to various theories in circulation for this upsurge. “The first is the most simple and is Saudi Arabia’s stated policy; it is raising output in response to stronger demand and it believes the cheapest producers should have the biggest share of the market.”

The second theory, however ‘sees Saudi Arabia ramping up output ahead of Iran returning in full force to the oil market after a nuclear deal with western powers.’

The battle royal has just begun.

Published in Dawn,July 21st, 2015

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