Is Iran going to change the rules of the game on the oil markets?

Oil exporting countries and oil companies may be hoping for a higher oil price on the international markets, but most analysts say the second half of the year will be as ‘dry’ as the first part in terms of pricing, or even worse. The deal reached with Iran on July 14 is bound to change the scene on the international markets, although that may not happen overnight. One analyst from Frankfurt was saying not long ago that “the price of oil is much more reactive to Iran and China than to Greece.”

The outlook is unclear. On one side we have the OPEC countries’ hunger for cash and the US shale oil producers. On the other side, what will happen when Iran comes freely on the market? Firstly, Tehran will regain access to its frozen assets abroad of some USD 150 billion. Secondly, it would try (sooner or later) to regain its market share. Some scenarios emerged lately. Sources say Iran is able to sell some 30 to 40 million barrels of oil. There is no secret about the oil stored in vessels near its shores. Going further, some analysts predict that by selling some 200,000 barrels per day the stored oil could last for six months, the needed interval for Iran to boost its production from the oil fields and get the oil on the market. Well, this would mean about 500,000 to 1,000,000 barrels of oil per day more on the market. A good reason for prices to fall.

It may take several months for the US Congress to give the go-ahead to the Iran deal, but it’s almost certain that Tehran would want to recover the time lost and cash in money for investments and consumption. Other analysts say Iran’s oil offer will increase by about 60 percent within a year, which would most likely lead the oil price on international markets below the USD 50 per barrel threshold. Sources say Tehran is eager to invest and, in order to update its oil industry, needs about USD 230 billion. The perspective of increasing output to some 4 million bpd in 2017, as sources suggest, is certainly giving shivers to some market players. The sanctions are yet to be lifted, but several investors are already eyeing Iran. Brokerage Renaissance Capital predicts USD 1 billion will pour into Iran in the first year after sanctions end, bakken.com informs. First Frontier Capital Ltd. is in the process of setting up a sanctions-compliant fund dedicated to Iran, hoping to allow investors to take a position in Tehran’s bourse before sanctions are lifted. MENA Capital is also getting ready to invest, the same source reads.

Although there are fears about a sudden flooding of the market, there are also voices anticipating a much slower pace of Iran’s regaining access to exports. Some say Iran’s oil supply will get on the market in the second half of 2016 and there will be no outpour.

However, for the time being, the outlook for the months to come is rather steady. In its monthly report on July the OPEC thrives with optimism in regard to 2016, envisaging an increase in world demand by some 1.3 bpd and a more balanced market as the OPEC countries’ output is expected to be higher than the one coming from non-OPEC countries. Demand for OPEC oil might reach 30 million bpd in 2016, but prospects for H2 this year were cut to 29.21 million bpd.

There may be different points of view regarding the OPEC outlook, however currently the prices on the international market are still far from the expectations of oil exporting countries. By mid July the quotations stood at USD 57.49 per barrel of Brent oil to be delivered in August, while the light crude sweet (WTI) was sold for USD 51.83 per barrel. Those not satisfied with the current quotations may be reminded the quotations in January of USD 45 per barrel. Oil exporting countries concern for the international demand and price level respectively comes from their domestic needs. Accustomed with high revenues their budgets were drawn based on much higher expectations. The fall of prices last year (from USD 107 per barrel in June 2014) to the current level turned their budgets upside down and most of these countries had to operate cuts in expenditures. Nevertheless the hunger for revenues is high. Recent statistics show what level of oil price some countries would need in order to balance their budgets: Libya would need USD 184 per barrel, Iran – USD 131, Algeria – USD 131, Venezuela – USD 118, Russia – USD 105, Saudi Arabia – USD 104, Iraq – USD 101, UAE – USD 81, Kuwait – USD 78 and Qatar – USD 77.

But the world developments are not in favour of price enhancement. Developments in China, the soon to come lifting of sanctions against Iran, Greece and the need for cash of many oil exporting countries makes more probable to have a flooded market all along the second half of this year. Iraq, the second biggest OPEC producer, is maybe the best example when it comes to need for cash. According to the International Energy Agency its oil production reached in June the peak of 4.1 million barrels per day. But Iraq does need money in its fight against ISIS which, according to sources, controls some 10 percent of Iraq’s oil fields and more are claimed. On the other hand, although the output was lower, last year Iraq was cashing about USD 300 million per day, now the revenues reach only USD 240 million per day. But his peak oil production is not going to keep its level for long, the Iraqi government has announced it would slow production later this year. Bad for Baghdad, of almost no importance for the international market.

In another development, oil prices were going slightly down on uncertainties related to Greece (later on Athens has reached an agreement with the EU leaders, it remains to be seen if the deal can be carried out) but even more related to China. On July 8 more than 500 China-listed firms announced trading halts on the Shanghai and Shenzhen exchanges, taking total suspensions to about 1,300 – i.e. 45 percent of the market or roughly USD 2.4 trillion worth of stock - as companies scuttled to sit out the carnage. The CSI300 index in China lost one third of its value since June, considered the steepest correction after the world crisis in 2008. On June 8 the index closed down 6.8 per cent. Later on the markets calmed down, but this came just after the Beijing pressures to suspend personal stocks and to prohibit short selling as well as taking other decisions aiming at solving the situation. Nevertheless, analysts are reluctant to see the problem solved on long term. Anyway, they also see reasons for more downward pressure on international oil prices, deriving from the fall of demand from China.

All these above mentioned developments fail to become arguments for a higher demand on the market and in favour of an upward trend in terms of oil prices. As said, OPEC is optimistic at least for next year, leaving the last part of 2015 in limbo for the time being. The International Energy Agency sees things different for countries outside OPEC, with no increase in production for the first time since 2008, anticipating slowdown in demand.

It remains to be seen if the lifting of sanctions against Iran and the country’s approach regarding oil exports will change the rules on the market, or will make other exporters rethink their strategies.

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July/August 2015

June 2017