Summary: Here Stratfor discusses one of the big economic and geopolitical questions about the Iran deal, much more important the deal’s effect on Iran’s conjectural nuclear program (30 years of a nuke coming really soon). Low prices have depressed the economies of key nations such as Russia and the Gulf States (plus oil-producing areas of the US). If new oil from southern Iraq and Iran depresses oil prices even more we might see some shocks of a kind unimaginable in the heady days of $100 oil.
The nuclear agreement between Iran and six world powers will naturally have consequences for global oil markets as Iran, the world’s third-largest oil producer before the Iranian Revolution, eventually exports more oil. Prior to the implementation of sanctions in 2012, Iran was a major crude oil and condensate exporter to Asia, Europe and others — in fact, exports totaled 2.6 million barrels per day in 2011. Today, that figure has fallen by almost 600,000 bpd to Europe and another 600,000 bpd to Asia. Iranian exports now hover closer to 1.4 million bpd, 1 million bpd of which is crude oil.
The July 14 deal paves the way for sanctions to be relaxed by early 2016, enabling anyone to buy oil from Iran. While Iran maintains that it can increase oil production by 500,000 to 600,000 bpd within one month of the removal of sanctions and increase exports to 2.5 million bpd within three months, Stratfor sees these figures as overly optimistic. Iran does, however, have at least 35 million barrels of crude oil and condensate in storage that it could use to increase exports in the interim before its oil production rises again. 2016, consequently, will likely be another year where a healthy oil supply tamps down any oil price recovery.
New Oil Fields and Stored Petroleum
Yet while sanctions were in force, Iran did not totally abandon the development of new oil and natural gas fields. At times with Chinese assistance, Iran has been developing the massive South Pars natural gas and condensate field. (Condensate is a low-density mixture of hydrocarbon liquids that coexist with raw natural gas deposits in many natural gas and oil fields.) Over the past few years alone, 120,000 bpd of condensate production has come online, a figure projected to increase in 2016.
Condensate production is becoming a more substantial percentage of Iranian petroleum production. All told, new condensate production could easily add 100,000 to 200,000 bpd to Iranian oil production in 2016 with Iranian crude oil production separately increasing by as much as 300,000 bpd by the middle of next year depending on when the IAEA actually adopts its report. Whether crude production in fact reaches that level depends on how much Iran prepares before sanctions end, and we fully expect lower production figures. As more injection wells are put into operation and new wells are drilled, Iran’s oil production capacity could increase even more by the latter half of 2016 — perhaps even returning close to pre-sanction levels (an increase of about 750,000 bpd over current levels) sometime in 2017.
However, oil exports may well exceed oil production capacity. Iran has stockpiled substantial volumes of petroleum, a little more than half of it condensate, in tankers offshore and onshore storage tanks for the last few years. Stored Iranian crude oil, which totals 35 million barrels, could quickly be sold. Iran, though, is unlikely to flood the market with this oil storage right away, opting instead for sustained exports as production capacity comes back online over the course of 2016.
Finally, Iran’s oil exports will affect global energy markets and the countries in them. Renewed oil exports in 2016 will continue to keep global oil prices down, ensuring less risk to prices. Subsequently, countries suffering from low oil prices, such as Venezuela, will continue to be battered. North America will be affected as well. Expensive producers will continue concentrating on their most efficient operations, hampering supply growth and cementing previous production declines in the United States.