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Iran’s return to the oil market could trigger a “positive supply shock,” sending oil prices plunging by as much as US$20 per barrel, although Saudi Arabia will probably move swiftly to ensure a softer, $10-drop in crude prices.
Increasingly crippling sanctions imposed by Western countries to punish Tehran for pursuing a nuclear program has limited Iran’s ability to export its primary production over the past few years.
But in recent weeks, both Tehran and Washington have replaced their sabre rattling with a softer tone, raising hopes of a diplomatic solution, especially as the Iranian government hopes to resolve the nuclear dispute within three to six months.
U.S. Secretary of State John Kerry was to meet Iranian foreign minister Javad Zarif on Thursday in what is billed as the first direct contact between the U.S. and Iran in six years. Foreign ministers from the U.K., China, France, Germany and Russia also were to join in the discussion.
While there have been many false dawns in Tehran’s frayed relationship with the West, Iran is motivated to end the economic siege due to its catastrophic impact on the economy, especially the all-important oil sector.
Iran is a sleeping energy giant, sitting on the fourth-largest oil reserves and the second-largest natural gas reserves in the world. Its energy infrastructure, although suffering, can still sputter out more oil quickly if sanctions ease.
“It may not take a long time for Iran to reach pre-sanction levels, as it stopped production only due to declining exports,” said Sara Vakhshouri, president of Washington-based SVB Energy International.
Iranian oil minister Bijan Namdar-Zanganeh has pledged to return production to pre-sanction levels of four million barrels per day, although it may not be a realistic target as the country has acute capital shortage and lacks access to technology, said Ms. Vakhshouri, who once worked for the National Iranian Oil Co. International.
Once OPEC’s second-largest producer and important supplier to Europe and Asian markets, Iran’s exports had fallen to 700,000 bpd in May from a high of 2.2 million bpd a few years ago — roughly equivalent to Canadian oil exports to the United States. The Middle East country is losing US$4.2-billion due to the sanctions, and the economy could contract 1.3% this year to add to a miserable 1.9% decline in 2012, according to Francisco Blanch, Bank of America Merrill Lynch’s global investment strategist.
A sanctions-free Iranian oil could roil markets as there is already adequate supply sloshing around at a time of subdued global economic growth. Oil prices had been steadily rising as Iranian, Libyan and Syrian oil disappeared from the market, and it’s likely that the situation could reverse as some of the geopolitical flashpoints calm down.
With most of the threats fading “this will make it difficult to justify the extreme level of speculative length in crude oil,” Michael Lewis, an analyst at Deutsche Bank said in a note to clients.
Historically, the lifting of sanctions has hurt oil prices, said Mr. Blanch, pointing to Iraq’s return to the market in the 1990s.
“The sanctions were partially lifted initially in August 1991 and then again in October 1997 under the UN Oil-for-Food Program. In both occasions, global oil benchmarks experienced a major pullback, with Brent crude dropping by more than 25% and 55% in the three and 12 months that followed.”
However, Saudi Arabia, which has been cranking up production to record levels to offset falling output from unstable oil-producers, may cut its own production to ensure prices hold up, leading to a more subdued $10 decline, BAML said.
While West Texas Intermediate prices are expected to remain strong, prices could deteriorate next year in the face of rapid North American crude oil supply growth.
WTI spot prices have averaged US$98 per barrel year-to-date while Western Canadian Select is hovering around $77.75. A US$20 drop in WTI may make Canadian oil producers uncomfortable, but most will be able to keep their head above water.
RBC Dominion Securities Inc. expects SAGD projects to cruise along nicely at US$76 per barrel, assuming a heavy oil differential of 18%.
“We believe that a number of producers including Cenovus Energy, MEG Energy and Suncor Energy could proceed with development at lower oil prices due to higher than average resource quality and existing infrastructure that lowers costs and bolsters project economics,” the bank said in a Sept. 25 report.
Indeed, majority of the 270-odd Canadian oil projects will go ahead even at $70-$80 oil prices, says Brook Papau, vice-president at Calgary-based ITG Investment Research.
“Although some projects are likely going to be priced out, projects that have passed through the engineering phase and have crossed the Rubicon will go ahead, irrespective of market fluctuations.”
Increasingly crippling sanctions imposed by Western countries to punish Tehran for pursuing a nuclear program has limited Iran’s ability to export its primary production over the past few years.
But in recent weeks, both Tehran and Washington have replaced their sabre rattling with a softer tone, raising hopes of a diplomatic solution, especially as the Iranian government hopes to resolve the nuclear dispute within three to six months.
U.S. Secretary of State John Kerry was to meet Iranian foreign minister Javad Zarif on Thursday in what is billed as the first direct contact between the U.S. and Iran in six years. Foreign ministers from the U.K., China, France, Germany and Russia also were to join in the discussion.
While there have been many false dawns in Tehran’s frayed relationship with the West, Iran is motivated to end the economic siege due to its catastrophic impact on the economy, especially the all-important oil sector.
Iran is a sleeping energy giant, sitting on the fourth-largest oil reserves and the second-largest natural gas reserves in the world. Its energy infrastructure, although suffering, can still sputter out more oil quickly if sanctions ease.
“It may not take a long time for Iran to reach pre-sanction levels, as it stopped production only due to declining exports,” said Sara Vakhshouri, president of Washington-based SVB Energy International.
Iranian oil minister Bijan Namdar-Zanganeh has pledged to return production to pre-sanction levels of four million barrels per day, although it may not be a realistic target as the country has acute capital shortage and lacks access to technology, said Ms. Vakhshouri, who once worked for the National Iranian Oil Co. International.
Once OPEC’s second-largest producer and important supplier to Europe and Asian markets, Iran’s exports had fallen to 700,000 bpd in May from a high of 2.2 million bpd a few years ago — roughly equivalent to Canadian oil exports to the United States. The Middle East country is losing US$4.2-billion due to the sanctions, and the economy could contract 1.3% this year to add to a miserable 1.9% decline in 2012, according to Francisco Blanch, Bank of America Merrill Lynch’s global investment strategist.
A sanctions-free Iranian oil could roil markets as there is already adequate supply sloshing around at a time of subdued global economic growth. Oil prices had been steadily rising as Iranian, Libyan and Syrian oil disappeared from the market, and it’s likely that the situation could reverse as some of the geopolitical flashpoints calm down.
With most of the threats fading “this will make it difficult to justify the extreme level of speculative length in crude oil,” Michael Lewis, an analyst at Deutsche Bank said in a note to clients.
Historically, the lifting of sanctions has hurt oil prices, said Mr. Blanch, pointing to Iraq’s return to the market in the 1990s.
“The sanctions were partially lifted initially in August 1991 and then again in October 1997 under the UN Oil-for-Food Program. In both occasions, global oil benchmarks experienced a major pullback, with Brent crude dropping by more than 25% and 55% in the three and 12 months that followed.”
However, Saudi Arabia, which has been cranking up production to record levels to offset falling output from unstable oil-producers, may cut its own production to ensure prices hold up, leading to a more subdued $10 decline, BAML said.
While West Texas Intermediate prices are expected to remain strong, prices could deteriorate next year in the face of rapid North American crude oil supply growth.
WTI spot prices have averaged US$98 per barrel year-to-date while Western Canadian Select is hovering around $77.75. A US$20 drop in WTI may make Canadian oil producers uncomfortable, but most will be able to keep their head above water.
RBC Dominion Securities Inc. expects SAGD projects to cruise along nicely at US$76 per barrel, assuming a heavy oil differential of 18%.
“We believe that a number of producers including Cenovus Energy, MEG Energy and Suncor Energy could proceed with development at lower oil prices due to higher than average resource quality and existing infrastructure that lowers costs and bolsters project economics,” the bank said in a Sept. 25 report.
Indeed, majority of the 270-odd Canadian oil projects will go ahead even at $70-$80 oil prices, says Brook Papau, vice-president at Calgary-based ITG Investment Research.
“Although some projects are likely going to be priced out, projects that have passed through the engineering phase and have crossed the Rubicon will go ahead, irrespective of market fluctuations.”
