Report: Removing Iran Sanctions Would Impact Oil Prices

May 07:

Lifting sanctions on Iran could flow up to 1 million more barrels of oil per day into the market by year-end 2016, further tilting the oil supply-demand imbalance.

Moreover, the rise in oil production could spark a 13% drop in the Brent spot price and tighten the Brent/WTI spread next year, Thomson Reuters Oil Research & Forecasts said in a report this week.

But like other predictions involving volatile oil prices, this one also comes with caveats. The forecast assumes world powers involved in hashing out details in a nuclear deal would reach a final agreement by June 30.

Exactly when the sanctions would be lifted, enabling Iran to boost its oil output, remains in the air. Iran wants an immediate halt to sanctions, but there is no word on whether negotiators on the other side of the table are willing to grant that wish or impose a gradual lifting of sanctions.

Plus, as Thomas Reuters noted in the report, scrutiny of the deal by U.S. Congress could holdup U.S. action regarding lifting sanctions for 60 days, though the president has veto power. Aside from the potential political hurdles, the mechanics of it all could slow Iran’s ability to produce more oil.

“Current expectations are that the earliest Iran can begin deliveries will be December 2015, with volumes limited to approximately 200,000 b/d due to the technical requirements of restarting shuttered fields,” the forecast stated.

By year-end 2016, production is expected to ramp up to about 900,000 bbl/d.

“By that point our forecast predicts those volumes will have been largely priced into the market as the new supply is absorbed and higher priced barrels are forced out,” Thomson Reuters said in the report. “We are forecasting a 2016 Brent price of $61.01/b, a 13% decline from our baseline forecast of $70.22/b (which presumes no major increase in supply).”

So what does this mean for supply concerns in the U.S., where crude oil inventories remain high courtesy of record production from shale plays?

“Continued supply concerns in the U.S., which have kept WTI price depressed relative to Brent, are likely to shield the American crude market from a depression in Brent spot price,” according to the report. “Primary impact is likely to be felt in a tightening in the Brent/WTI spread from minus $8/bbl to minus $5/bbl on average in 2016.”

Thomson Reuters predicts Brent price and future prices will be impacted the most if the sanctions are lifted, as WTI spot prices typically respond more to U.S. unconventional production slowdowns.

Lifted Iranian sanctions could result in a $51.54/bbl average WTI price this year and an average $56.33/bbl average price in 2016. Brent price, the report forecasts, could average $56.55/bbl in 2015 with the price rising to an average $61.01/bbl in 2016.

A barrel of oil was trading the afternoon of May 6 at $67.51/bbl (Brent) and $60.67 (WTI).

“In our current best case scenario, no Iranian barrels are allowed to flow until August 2015,” the report said. “If an agreement is not reached by the June 30 deadline but talks are extended as they were twice in 2014, impact timelines will also be further extended into the future.”

The ability of oil-rich Iran to turn its hydrocarbon resources into revenue has been especially hindered in the past few years after the country’s illicit nuclear activity led to sanctions. The sanctions curtailed Iran’s ability to sell oil, which has impacted production and investment and resulted in a 1 MMbbl/d drop in crude oil and condensate exports in 2013, compared with 2012, according to the U.S. Energy Information Administration.

A partial easing of sanctions approved in 2013 allowed Iran to export up to 1 MMbbl/d. Iran sells most of its crude and condensate to China, India, Japan, South Korea and Turkey. The country’s oil and gas export revenue fell to $56 billion in fiscal year 2013-14 from $118 billion in 2011-12.

In a Bloomberg article May 6, Iran Oil Minister Bijan Namdar Zanganeh said the country could increase crude output in 10 days if the economic sanctions are removed. This, he said, could send production up to 3.8 MMbbl/d within six months, placing Iran as OPEC’s second-biggest producer.

Source: http://www.epmag.com/report-removing-iran-sanctions-would-impact-oil-prices-794741?#p=full