As Iran sanctions lift, more production may lead to lower oil prices

Iran sanctions likely to be lifted slowly

Iran sanctions
With the lifting of the Iran sanctions on oil, production in the Middle Eastern country could increase from 2.8 million bbl/d to 3.4 million bbl/d within months.

Oil prices that slumped steeply earlier this year may take another hit once a historic deal between the West and Iran allows that country to start pouring more crude into a market already brimming with supply.

Many analysts estimate that Iran, OPEC’s fourth-largest oil producer, has piled up tens of millions of barrels on floating barges that can be exported in fairly short order after sanctions have been lifted. The country will follow that with increased production from its oil fields.

When all this happens and how it ultimately affects the price of oil remains far from certain. Energy prices can depend on production levels in other countries, currency rates and demand sparked by the health of global economies. Plus there are questions about the state of Iran’s oil infrastructure and its ability to increase production.

Despite all the uncertainty, analyst Tom Kloza expects the lifting of sanctions to help make energy prices next year “more palatable for most of the world.” Kloza, global head of energy analysis for the Oil Price Information Service, noted that additional production from Iranwould be mixed in with high volumes currently being churned out by Saudi Arabia, Iraq, the U.S. and other oil-producing countries.

“All cylinders right now are just firing for high oil supply, and this just might be the turbo that throws more oil onto the market for 2016,” he said.

Those bulging supplies sent the price of oil plunging from $107 a barrel in June 2014 to a low of about $43 this March. The price rebounded to near $60 before sliding back last week as an Iranian deal seemed imminent. After initially dropping Tuesday on the announcement of the agreement, oil rallied to close up 84 cents at $53.04.

Iran produced about 2.8 million barrels a day last month, but its oil exports have fallen to about 1.1 million barrels since sanctions were enforced in 2012. The country’s oil fields are estimated to be capable of raising daily production to 3.4 million to 3.6 million barrels within months of sanctions being lifted, according to the International Energy Agency’s July oil market report.

However, potential roadblocks stand in the way. Sanctions likely will be eased slowly, and the Iranians may find it harder than they expected to bump up production, said Amy Myers Jaffe, an energy consultant and executive director for energy and sustainability at the University of California, Davis.

She noted that sanctions made it difficult for the country to obtain spare parts and assistance in operating its oil fields. Oil is essentially harder to extract from Iran’s fields than from those in other countries like Iraq, and international oil companies planning to start production there need to be wary of problems like corruption.

“Companies are going to have to be very careful about how they go in,” she said. “There’s just this bureaucratic bottleneck that comes from trying to do contracting with international companies … and those things can go very slowly.”

Oil industry analyst Blake Fernandez expects Iran’s production to grow gradually, with the country adding about 600,000 barrels a day through 2017. Over the long term, that additional volume may have a more limited impact on price if demand for oil continues to grow by an expected rate of approximately 1 million barrels a day.

“Longer term, we’re going to need those barrels,” the Scotia Howard Weil analyst said.

The Canadian Press