The Iran Nuclear Deal: The Great Oil Price Disruptor

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After a flurry of interest in the price of oil as levels bounced back up to $65/barrel from below $50 at the turn of the year, most of us have been quietly content to fill up for less at the gas pumps and patiently wait for the heralded but still unseen benefit to the economy of lower oil and natural gas prices.

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Political events may be about to change that cozy situation as Iran nears its crucial end of June deadline to reach a binding agreement on its nuclear program, the Telegraph reports.

Removal of the US- and EU-led sanctions against Iran could pave the way for an immediate relaxation of sales restrictions and opening of the country’s massive oil and gas reserves to development by International Oil and Gas Companies (IOCs). Iran is reported to be scoping a new contract termed the Iranian Petroleum Contract designed to allow major international oil companies a revenue-sharing deal in return for financial and technological investment in the country’s oil and gas sector. Iran holds the world’s fourth-largest oil reserves and the second-largest natural gas reserves. Production of both has fallen sharply since sanctions as this graph shows.

Source: Telegraph.com

Source: Telegraph.com

But this could be reversed over time with western expertise and technology. According to Energy Information Administration data quoted by the Telegraph, Iran could achieve an additional 1 million barrels per day of production in short order, rising over time as investment re-opened old fields and increased flow rates from existing fields.

According to the Telegraph “Iran’s exports of crude oil and condensate dropped from 2.6 million BPD in 2011 to almost 1.3 million BPD in 2013 as a result of sanctions and only marginally recovered by nearly 150,000 BPD to 1.4 million in 2014 as the political situation thawed.

Source: Telegraph.com

Source: Telegraph.com

At its peak before the Islamic revolution in the 1970s, Iran was producing anywhere between 5 million BPD and 6 million BPD of oil and has the potential to return to this level with sufficient investment. Iran’s oil minister is suggesting they could reach output of 4 million BPD next year if an agreement is achieved next week.

That would have a dramatic effect on an already oversupplied oil market and may provoke Saudi Arabia to yet again open the taps and further flood the market to maintain its market share. Most major OPEC producers are hurting at the current oil price, not because their cost of production is above $65 per barrel but because oil revenues make up the vast majority of their export revenues.

Budgets were set at a price of around $100/B and depressed prices leave them running at a deficit. Those with large reserves, like Saudi Arabia’s $700 billion one, can weather such a storm for some time to come. Others, such as Bahrain, are already going cap in hand to fellow Persian Gulf states asking for support.

Ironically, the worst off is probably Venezuela, although it is sitting on the world’s largest proven reserves, production has collapsed due to mismanagement and, with it, government revenues have fallen. Further falls could put the economy in a perilous state. A substantial increase in Iranian oil output would potentially put the Middle East’s two political heavyweights, Iran and Saudi Arabia, at loggerheads economically as well as politically in the second half of the decade.

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