A deal resulting in Iranian nuclear activity being limited in return for a lift of international economic sanctions has sent oil prices tumbling once again.
Fraser Hydraulic Power – which creates advanced hydraulic systems aimed at stimulating testing factors like oil temperature – looks at how far-reaching the proposed deal could be across the international oil market.
Terms of the deal and its immediate effect
The agreement – which involves Iran and six world powers, the UK; the US; France; Germany; Russia, and China — means that there is potential for around one million new barrels of oil from Iran to be put on the global market.
As a result, a group of 25 oil analysts surveyed by the Reuters news agency acknowledged that Iran has the possibility to raise its oil exports by up to 60% within 12 months.
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These details, alongside the announcement of the deal, has already been felt across the oil market, with the price of Brent crude falling by $1.15 to reach $56.70 a barrel and US crude oil now set at $51.51 — a drop of $1.05.
Optimism in the long-term
While Iran’s compliance with the terms of the agreement will still need to be verified by nuclear inspectors before the sanctions are lifted, there is a lot of optimism about the deal.
Sarosh Zaiwalla – a lawyer based in London who specialises in sanctions – pointed out to BBC News: “Sanctions have crippled Iran’s oil production, halving oil exports and severely limiting new development projects.”
Research by the US Energy Department backs up Zaiwalla’s claims.
The Wall Street Journal reports that the organisation understands that oil exports across Iran have dropped by almost half since strict sanctions were introduced by the US and the European Union in 2012.
This is the equivalent of Iranian exports averaging 4m barrels a day towards the end of 2011 but only reaching 1.4m barrels a day last year.
However, Zaiwalla added: “Foreign trade and investment will allow Iran to make huge efficiencies and drive down the cost of production.”
Challenges ahead for Iran
Getting large quantities of Iranian oil to the global market will not be a task completed overnight however.
As well as the earlier mentioned compliance by Iran – which Western officials believe could take until the end of the year for all parties to be content with – the country faces stiff competition in the oil industry.
In fact, Iraq, Kuwait and Saudi Arabia are just three countries currently securing deals in order to maintain and expand their current market share. Resulting in Iran entering a tough price environment.
On top of this, a lack of buyers has resulted in Iran having to either suppress or stop some of its flow of oil.
Therefore, work will have to be carried out in order to revive production on these aging fields.
Bearing all of this in mind, Michael Cohan, an energy analyst at Barclays, stated to the Wall Street Journal: “Iran’s efforts to raise oil exports could not have come at a worse time, given the market’s lingering oversupply.”
Energy Aspects’ chief oil analyst Amrita Sen also focussed on the oil market potentially being oversupplied, telling BBC News: “Given how oversupplied the market is with Saudi output at record highs, the mere prospect of new oil will be bearish for sentiment.”
