Iranian nuclear deal does not pose an immediate challenge to the oil market and to the oil exporting countries, say analysts a day after the West Asian country signed a deal with six world powers on Tuesday.
Oil price have rebounded after dropping more than a dollar on the same day and have extended gains in Asian trade on Wednesday, with Brent crude futures approaching $59 per barrel prices after it became apparent that the Iranian nuclear deal would not immediately remove sanctions.
Iran and P5+1 countries, the US, UK, France, China and Russia, plus Germany, reached a deal limiting the oil rich country’s nuclear programme, in return for the lifting of sanctions against Tehran.
Oil market woes
There are fears around that Iran, whose exports have been sharply curbed by sanctions in recent years, could within a year add up to 800,000 barrels a day to the global oil market that has already been hit by oversupply and falling prices.
Iranian officials had earlier stated that if a nuclear accord is reached and sanctions are being relaxed, Iran can double its oil exports in the next six months by producing one million barrels per day (BPD).
The country has been holding up to 40m barrels of crude oil and condensate in floating storage, which it has been unable to sell because of the sanctions imposed on it over the past years.
The world oil market has seen a massive drop in prices since last summer. The International Energy Agency (IEA) has recently warned that oil prices may fall further despite stabilising in recent months because of a massive oversupply.
Despite decline in prices, the Organisation of Petroleum Exporting Countries (Opec) have refused to cut oil production while demand for oil in economies across the world from Europe to China – the world’s second-largest consumer of oil – has slowed.
The Opec crude oil production rose 340,000 BPD in June to 31.7 million BPD, a three-year high, led by record output from Iraq, Saudi Arabia and the United Arab Emirates.
Moreover, US oil production has also soared in recent years, as fracking – or the process of extracting oil from shale rock by injecting fluids into the ground – has revolutionised oil production in the country.
Lifting of sanctions
Analysts are saying that sanctions on Iran are unlikely to be lifted until 2016 and that Tehran’s ambition to boost output by 1 million bpd may not materialise soon. The country is not likely to receive many of the benefits from the lifting of sanctions until next year because of the need to verify the nuclear deal’s implementation.
“New oil will not flow from Iran until 2016 and there will probably be less of it than optimists predict,” Reuters quoted Richard Nephew, Program Director for Economic Statecraft, Sanctions and Energy Markets at the U.S. Center on Global Energy Policy, as saying
“I estimate 300,000 – 500,000 new barrels of oil on the market within 6-12 months after a deal begins to be implemented,” said Richard.
“We don’t expect a massive flooding of new oil into the market from Iran in the next couple of months. But we would really start to see an increase from the beginning of next year according to our understanding,” says Khatija Haque, Head of MENA Research at Emirates NBD.
Meanwhile, OPEC delegates have told Reuters that its members are likely to keep oil output steady and defend their market share this year since a full return of Iranian crude to the market will not be swift
They doubt that Iran’s return would pose a serious challenge to their market share or force OPEC to address Iran’s request for room to be made for it in the market, at least for now.
Middle East reserves
Meanwhile, analysts have said that the oil exporting countries in the Middle East have no imminent reason to worry about drop in oil prices at the outset of Iran’s reentry into the market.
“The GCC countries, particularly the four big economies, Saudi Arabia, UAE, Qatar and Kuwait, have very significant reserves to cushion against falling oil prices and they could sustain spending for a substantial period of time without running into any difficulties in terms of financing,” says Khatija.
“However, oil price at $60 does mean that most of the governments in the region are going to be running deficits. It would then put a lot of scrutiny on their budget expenditure,” adds Khatija.