How will the Iran nuclear deal impact oil prices?

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July 15, 2015 by Nash Riggins

640px-Thunder_Horse_SemisubFrom the outside looking in, you would never guess that Iran is a rich country. It’s got sky-high unemployment, an atrocious poverty rate and no real economic growth to speak of. But in a matter of months, this cantankerous theocracy is going to turn the global energy market on its head.

This week, the US and Iran reached a landmark deal that will thaw some 30 years’ worth of ice-cold relations. The agreement? Iranians will impose a series of new restrictions to their fledgling nuclear energy programme in exchange for the lifting of crippling economic sanctions. Make no mistake: grouchy Republicans in US Congress will do their absolute damnedest to try and block any domestic ratification the deal might require. But in the end, all of these melodramatic gripes will inevitably fail.

Like it or not, the deal is done.

Now, for many young Iranians, this diplomatic triumph is bound to feel like the toppling of the Berlin Wall – and the immediate financial aftermath for the theocratic republic will be far-reaching. After all, Iranians have got about $150bn in frozen assets that are currently floating around in outer space. The moment those funds hit the ground, demand for over-priced tablets and imported cars will go sky-high. It’s no wonder Apple and GM are already said to be plotting a swift re-entry into Tehran.

But more important still are the implications this deal will have on the global oil market.

You might not know this, but Iran is currently sitting on top of the fourth largest supply of oil on planet earth. Yet due to a series of ages-old UN sanctions, Iranian suppliers haven’t had many people to sell that oil to. Despite the reliable custom of nations like China and India, demand just isn’t there – and so in the last seven years, Iranian oil production has shrunk from four million barrels a day to just over one million.

The moment these sanctions are dropped, the market will become absolutely flooded – and Saudi Arabia and other high-capacity OPEC nations are going to be pretty pissed off.

Since the middle of last year, the price of oil has been engrossed in a proverbial freefall. In the span of just six months, it dropped from $110 per barrel to less than $48 (courtesy of American frackers). Gas-guzzling drivers across the globe came together in jubilation. But the Saudi oil cartel was less than impressed – and over the past few months, OPEC has launched a devastating campaign to all but eradicate this new source of US oil exports.

How? By pumping out even more oil, obviously.

Last month, Saudi Arabia hit a record-high in oil production by churning out some 10.56m barrels per day. Believe it or not, this loss leading strategy has paid off, and investment in new fracking sites across America has completely disappeared. OPEC’s in-house economists are predicting growth in US oil production to shrink by around two-thirds next year. Consequently, everyone seems to think that oil prices will begin to rise steadily once more – and ‘hopefully’ get back to where they were this time last year.

Cue America’s long-awaited thawing of relations with Iran.

Now, because demand for Iranian oil has been virtually non-existent for the past decade, infrastructural investment has all but diminished. So, Iranian producers don’t yet have the necessary tools in place to ensure sites can start churning out their full potential by the time sanctions are lifted. But they do have over 40m barrels of oil currently wasting space floating in the Persian Gulf. In the short term, this surplus will seriously undermine any price increases the Saudis have been working so hard to achieve. The mere mention of this week’s nuclear deal brought oil prices down by over $1 per barrel.

And while the Iranians are selling off their surplus, European companies like Royal Dutch Shell will inevitably swoop in and invest hundreds of millions in local infrastructure. With the backing of these European giants, experts reckon Iran could increase production by up to 500,000 barrels per day in the next six months alone.

So, what does all of this mean for gas prices? In the next few months, virtually nothing. US Congress will try to delay the lifting of oil sanctions until the eleventh hour, and OPEC will continue its frantic campaign to oversupply the market and chase everybody else out of business. Oil prices will keep going up at a relatively predictable rate.

But at the start of 2016, Iran’s re-entry onto the global energy scene will completely decimate that recovery. Is that good for economic growth in general? Probably not, and the Saudis will be unforgiving. But Republican presidential hopefuls will certainly forget all of this ‘axis of evil’ talk the moment they start filling up their gas tanks.

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