The US-Iran nuclear deal is likely to have radical implications for future supply within the global crude oil markets as it could open up a vast field of untapped reserves. The agreement paves the way for the relaxation of a raft of sanctions that would allow Iran to ramp up their crude oil production and exports. However, despite the agreement, it is likely to take at least six months before the crude oil market is impacted by the additional supply.
The agreement subsequently requires a range of steps to be undertaken prior to the lifting of international sanctions. In fact, the deal will need to pass through the UN Security Council as well as the US Congress, which further complicates the time line. Subsequently, there is little chance of Iranian crude flooding the market before 2016, at the earliest.
Once Iranian sanctions have been lifted, Iran could potentially start exporting the oil that has been stored afloat in their offshore tankers. The current volume of crude oil in floating storage is estimated to be around 20-40 million barrels but Iran is unlikely to want to shift all of this at once. The IEA has estimated that the country could potentially sell up to 180,000 barrels of oil per day without upsetting the current market equilibrium.
However, the long term implications of a resurgent oil industry in Iran are more troubling as the countries proven reserves total 158 billion barrels of high quality crude. In 2008, Iran was exporting approximately 4 million barrels of oil per day which would represent a significant increase in the world’s current level of supply.
It should be noted that years of under investment in the production infrastructure is likely to see initial production well below that level. Foreign investment will likely be required, in the amount of $50 to $100 billion, to modernise the oil fields and the supply chain. Considering that global oil companies are already negotiating to access the Iranian energy sector, foreign CAPEX investment is highly likely.
Subsequently, my short term view of the Iranian deal is that it does little change the current market determinants and that crude oil prices are likely to remain between the $50.00 - $60.00 range throughout the remainder of the year. However, in the long term, the additional Iranian supply is likely to damage prices as it adds to the current supply imbalance.
A resurgent oil producing Iran has the potential to cause bearish pressure on the markets as other countries also increase production to maintain their export revenues and market share. As long as OPEC remains committed to a strategy of damaging high cost producers through oversupply, the bear crude oil market is likely to remain.