Yet Another Oil Bust Likely Ahead as ‘Nuke Compromise’ With Iran Nears

Oil prices might sharply fall to $35/bbl and beyond in case the Iranian nuclear deal is signed before the April 1 deadline.

Kristian Rouz – 24 hours before the deadline in another round of negotiations between the world’s major powers and Iran, chances are high the long-anticipated deal mightallowing for Iran to gradually increase its oil exports in exchange for more transparency and international accountability of its atomic ventures.

Representatives of the six major nations, namely, the US, the UK, France, Germany, Russia and mainland China, have been slowly gaining ground on the diplomatic battlefield, moving towards coercing Iran into abandoning its plans to obtainnuclear weapons, concentrating on developing atomic power plants and medical isotopes under thorough international supervision.

Iran’s economy has been subject to the international sanctions since 2012, severely impaired Tehran’s ability to sell crude oil abroad.

Iran’s export capacity reached some 2,5 mln bpd of oil just before the sanctions were introduced. These days, the Islamic republic is hardly able to sell 1 mln bpd. The economic consequences of the international sanctions trapped Tehran in dire straits. 

The prospect of Iran more than doubling its oil supply to the global market in the short-to-mid-term is weighing on oil price. Traders are well aware that during the two years the sanctions have been intact, Iran has accumulated significant stockpile of crude oil, ready to flood the market, sending the price below any intelligible mark at this point.

According to some sources, Iran has some 30 mln bbl of oil already pumped into its sea tankers, ready for shipping once that sanctions are lifted.

Oil prices tumbled overnight, with US WTI light crude down $0.72 to $47.84/bbl, Brent crude down $0.84 to $55.57 early Tuesday in London.

Another factor in oil prices tumbling is a stronger US dollar, weighing on all commodities’ valuations. Among other factors is the global oversupply of oil, sluggish growth prospects (with BofA analysts anticipating even an onset of a global recession in 2015) and technological advances in energy sectors all across the globe.

At this point, the only salvation for the global crude market (and the world’s select petrocracies) from the doomsday, marked by the second coming of the Iranian oil exports, is for the international sanctions against the Islamic Republic to be lifted only gradually, depending on the progress in implementation of the possibly reached agreements.

Iran is currently exporting its 1.02 mln bpd in Asia, 25% down in an annualized estimate, as Indian refineries recently cut their purchases of Iranian crude. Some international monitors suggested Iran could hike its export capacity by another 500,000 bpd in a matter of three to six months, then another 700,000 bpd in 12 months. However, the currently ready-to-ship 30 mln bbl are more than enough to knock down the global oil market.

Global supply of oil reached 93,440 mln bpd in Q1 2015, according to the estimates by the US Energy Information Administration (EIA), while consumption was only 92.280 bpd in Q1. Now, with roughly 30 mln bbl of Iranian oil, almost a third of global oil output put to market, the price of oil might shrink at the very least by a third. That said, if the Iran sanctions are lifted at once, a barrel of Brent crude might depreciate to $35/bbl and further below in case global  conomic growth does not pick up quickly.

That said, of course Iranian sanctions would not be lifted all at once, as such a move would provide an unbearably strong shock to the system.  The current round of negotiations might even end in a yet another stalemate, as Iran might go on protracting time in hopes to develop its own nuke.