By the end of this week (Friday 20th March) there is a chance that a deal over Iran’s nuclear development may be agreed with the West. To recap, in mid-2012 sanctions were imposed against Iran’s oil exports, precipitating a drop from 2.5 million barrels per day to close to 1.4 million per day – the lowest since 1986. Any deal may allow the removal of sanctions on Iran’s oil exports, the impact on the oil price however will depend on the detail.
What are the chances of a deal being done? Many commentators have pointed to low oil prices and the impact it has had on the Iranian economy as increasing the likelihood of a deal. To put this in perspective, the 26-year reign of Iran’s Supreme Leader has seen oil prices range from as high as $147 per barrel to as low as $10 per barrel – and there’s never been much of a correlation between oil price and his behaviour. Despite this a confluence of political factors could make a deal more likely now than ever.
If a deal were to be reached that resulted in the immediate lifting of oil export restrictions, the Iranian authorities assert that the country could increase production from around 2.8 million b/d to around 4 million b/d while doubling exports. However, turning the oil taps back on ignores the technical realities involved after oil wells have been switched off for some time.
Despite fears that lifting sanctions will flood the market, the reality is likely to be quite different. Given current market conditions, only limited international investment will likely be available to help restart its production. For one thing, Iran is not thought to have offered particularly attractive terms to investors (although under sanctions there is little international oil companies can do anyway), and at today’s oil prices, oil companies are cutting back everywhere.
Any rebound in exports is also likely to lead to further internal pressure within OPEC to cut production. If sanctions are relaxed then even accounting for the technical difficulties in expanding output the deal is likely to put further downward pressure on oil prices.
Back in January Bijan Zanganeh, Iran’s oil minister said his country could withstand lower oil prices. “Even if the oil price goes down to $25 a barrel, the oil industry will not be threatened,” the oil minister is quoted as saying.