How Iranian Nuclear Deal Would Affect International Oil Markets
The framework nuclear deal between Iran and six global powers on Thursday boosts the odds for the lifting of curbs on Tehran’s oil exports, but it doesn’t throw open the floodgates of Iranian crude supply just yet.
Any ramp up in Iranian oil exports depends on a final nuclear deal in June, a subsequent lifting of sanctions and the pace of recovery in Iran’s investment-starved oil sector.
Oil prices fell after the framework deal was announced, with Brent crude losing 3.7% in the last trading session, but consulting firm Eurasia Group said the drop in the oil price will likely wash out when harsh debate over the agreement begins next week.
If a final nuclear agreement is reached by the end of June, it could take three months to lift or suspend oil and banking sanctions against Tehran and another six months to restore 1 million barrels a day of oil production and exports, according to French bank Société Générale.
“Iranian crude will not become a major issue for the oil markets until 2016,” the bank said.
Once sanctions are lifted, initial Iranian crude sales could begin trickling in from its stockpiles. Iran has put large volumes of crude into storage as it produced more than it could export or consume domestically.
The bulk of Iran’s oil is exported from the islands of Kharg, Lavan and Sirri in the Persian Gulf, with a combined storage capacity of around 38 million barrels of oil, according to the U.S. energy department. In addition to these terminals, Iran also uses its supertankers for oil storage, because tight western sanctions on shipping and insurance made it difficult for state-run National Iranian Tanker Co. to operate tankers in global waters.
“Iran-owned tankers have nothing better to do anyway, given that they are themselves strangled by U.S. sanctions,” said Ralph Leszczynski, research director at Italian ship broker Banchero Costa. He said may of these are being used to store crude instead.
Since the beginning of February, an estimated 15 very large crude carriers, or VLCCs, have been anchored off the Iranian coast for oil storage, equal to around 35 million tons of oil, according to London-based E.A. Gibson Shipbrokers Ltd.
China, India, South Korea, Japan and Turkey are the largest buyers of Iranian crude, with the bulk going to Asia. Iranian oil sales will have to be at discounted rates to compete in the current oversupplied market and will flow heavily to buyers in Asia, Singapore-based traders said.
India in particular is expected to ramp up its Iranian oil imports, as the government had instructed refiners to cut purchases in the first quarter of this year to meet annual targets. Its refiners will resume Iranian purchases in April, when India’s new fiscal year begins, consulting firm Energy Aspects said.
Iran’s oil and condensate exports had dropped from 2.5 million barrels a day in 2011 to 1.1 million barrels a day in 2013 because of sanctions. Exports recovered marginally to around 1.27 million barrels a day in 2014 after an interim deal was signed. Energy Aspects estimates discharging floating storage alone could increase Iranian oil exports to 1.3 million to 1.4 million barrels a day.
If sanctions are lifted Iran could supply another 1 million to 1.2 million barrels of oil a day by next year, adding to the global oversupply and pressuring oil prices. Although Iran’s oil sector will struggle to recover to its full production capacity, there’s enough potential supply for other OPEC and global oil producers to contend with in coming months.
(Source: The Wall Street Journal)