No doubt, the deal is good for the Iranian economy which has been severely hit after a decade of sanctions
restricted the amount of oil
the country could sell. Iran
surely will be happy with the deal but the same cannot be said about other oil-producing nations.
producers have been affected by the fall in crude oil
prices after the US
increased shale oil
production. From being one of the biggest importers of oil, the North American superpower turned a net exporter for the first time. Meanwhile, other oil
producing countries kept on pumping more oil
in a fight for market share.
To add to this, a global slowdown, especially by China – the biggest importer of oil
in the world – has affected demand of crude oil.
Europe too is reeling under deflation and Russian currency devaluation has made its oil
cheaper. All these factors have contributed to oil
prices and the net result is that the global oil
market is now a buyer’s market, with supply exceeding demand.
Iran, once the sanction is formally lifted, will only add to the supply problem of the oil
market. Iran’s oil minister has said
that his country can add an extra 500,000 barrels per day within a month and around 1 million barrels per day within six months of the sanctions
being removed. Iran
currently exports about 1.3 million barrels per day (bpd) of oil, down from its 2.2 million bpd level ten years ago, before sanctions
The extra crude
will obviously have an adverse impact on oil
prices; however, there are two points to be taken into consideration. One, with Iran
increasing production, will the other OPEC
(Organisation of Oil
Exporting Countries) countries consider reducing their production?
This seems to be unlikely as even during the worst period of the oil
slide when it nearly touched $40 a barrel none of the OPEC
nations cut production. The fall in oil
prices, however, resulted in many shale oil
rigs closing down. OPEC
countries maintained their production levels, and sometimes even exceeded them. Saudi Arabia, the largest oil
producer in the world, increased oil
production to its highest mark of 10.56 million barrel per day last month. Now Iran
will have to join the fight for market share in order to bring its increased production to market, which can only be possible by pushing prices even lower.
has the fourth largest oil
reserve in the world. Though it produces only 1.3 million barrels per day, it is sitting on an inventory of around 40 million barrels stacked in its onshore tanks and over a dozen oil tankers floating on its shores
. This oil
can immediately hit the market.
Two, most of Iran’s oil
wells have been mothballed for the last ten years. They will need some investments and refurbishment to start. Oil
experts feel that these wells along with new ones will be ready to produce within a year. This will give the physical oil
market sometime to adjust, but the futures oil
market will discount this event immediately. Crude oil
is already trading 2% lower despite not an extra barrel of oil
leaving Iran’s shores.
deal will surely increase supply and keep prices low unless demand picks up. But demand picking up is a more unlikely prospect than supply side disturbance.