Western sanctions on Iran have been in place since 2011. The country’s current production of ~2.9 million barrels per day (mb/d) is about 800 kb/d to 1 mb/d below pre-sanction levels. With a deal over Iran’s nuclear ambitions now signed, energy investors are trying to determine when physical Iranian barrels will return to the market and what quantity the country can export.
When will Iranian oil return to the market?
We don’t believe the suggestion that Iran can return production to pre-sanction levels within months of a sanctions reprieve. Verification of nuclear agreements will likely take time – inspectors need to conduct their reviews, etc. – and so we expect the impact of Iran openly selling oil is more of a 2016 event.
How much will it be?
Regarding the volume they can ship, there’s a wide range of numbers out there, but we think it’s reasonable to expect Iranian exports will recover by an additional 500 kb/d over the next year at most, due to:
- Iran’s heavy underlying mature-field decline,
- growing domestic oil consumption, and
- the likelihood that sanctions will be suspended gradually, rather than terminated suddenly.
Iran has around 30 to 50 million barrels of oil in floating storage, according to news sources, so some of this could potentially come to market at the end of this year. This could put a bit of pressure on the crude market, but we don’t foresee a US$10-$20/barrel drop in prices.
Iran’s additional contribution to the global market could temper the extent of an oil-price recovery; however, it doesn’t change the thesis on producers needing US$75/barrel to make new investments. In total, the cumulative capacity of major project volumes that have been deferred or cancelled is shocking – now approaching 6 mb/d.
Only a few U.S. companies have discussed small rig count additions if West Texas Intermediate (WTI) were to get back to US$65/barrel, which is far above current prices. We expect these companies will have to continue to reduce investment in 2016 if oil prices remain depressed.
All of this sets up for a recovery, but it will likely take time. While Iran’s increased oil exports could temper the ultimate recovery of oil prices, we were never calling for WTI to go back to US$90-$100/barrel. We still think US$75/barrel is necessary.
All data provided by Invesco unless otherwise noted.
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