In physics, momentum is the product of a body’s mass and its velocity or its impetus resulting from its motion. A system can gain or lose momentum only if its mass or velocity changes.

The same thing applies to politics. The European negotiations with Iran gained momentum in 2013 when the permanent members of the Security Council joined the negotiations, and had to end with some result because politicians hate to go home with nothing in their bags.

So much is now written about the deal between the P5+1 and Iran and it remains to be seen how its application will evolve. The road may be bumpy, but let us assume here that all goes well and see what the implications for the oil markets are.

The “historic and monumental” deal caused, as everybody expected, a knee-jerk reaction in oil prices as soon as the deal was announced on July 14, declining by about a dollar a barrel. But it went on to recover the loss and settle higher by about a dollar a barrel, as the market realised there was no immediate threat of new supplies from Iran in an already glutted market.

It had already anticipated the momentum of the negotiations and discounted the price accordingly judging by the fall in oil prices since May.

Iran did not get its way of lifting all sanctions immediately at the time of the signature. It has to wait until the International Atomic Energy Agency (IAEA) submits a report in mid-December announcing that Iran has fulfilled all its obligations in the agreement before sanctions can be lifted.

Therefore, even if all goes well, Iran is not expected to sell any additional crude before the end of 2015 or beyond if some hitches appear on the way.

Analysts are differing widely on the extent of future production. The IEA said that Iran could raise production by between 0.6-0.8 million barrels a day (mbd) within months of sanctions being lifted.

Boosting shipments

Iran’s Oil Minister Zanganeh stated during the last Opec conference held in Vienna in June that Iran will pump additional 1 mbd within months of sanctions being lifted. The Minister had earlier said that Iran is capable of boosting shipments by 0.5 mbd as soon as sanctions are lifted, and by the same amount in the subsequent six months.

Florida’s Raymond James analysts recently stated, “We think it is unrealistic to expect additional supply from Iran until sometime in 2016” and “We reaffirm our view that, even over the medium term (12-18 months), there will not be more than 500 [thousand] barrels per day of incremental exports (which equates to 0.6 per cent of global supply) -- not nothing, but hardly a game-changer.”

Commerzbank AG estimates Iran will be able to restore about 0.5 mbd of oil exports by mid-2016. Goldman Sachs says adding 0.5 mbd will take about a year to demonstrate compliance with the nuclear deal and revive ageing wells.

Interesting analysis by the Washington based consultants Clearview Energy Partners suggest that by the next six to nine months, production may increase by 0.1-0.3 mbd after officially lifting sanctions, and by 0.5 mbd within a year of lifting sanctions.

They estimate Iranian supplies could cut prices by $12 a barrel by end 2016. This may be a very bearish view but it could happen if the current oversupply of 2 mbd persists and Iraq production keeps rising or if Libyan production comes back into the market. Saudi Arabia is producing 10.56 mbd, the highest in 30 years and does not appear to be cutting production soon.

Future deals

Furthermore, Iran has over 30 million barrels of oil stored in floating tankers and will try to sell this volume. That will have an impact depending on how quickly the sales go.

Surprisingly many analysts are suggesting that Iran cannot raise production substantially without investments by international oil companies. I don’t know whether this is real or just to push Iran in this direction the way it happened in Iraq.

In any case there are western companies discussing future deals with Iran now and a conference in September is likely to lure more. This may take a long time and its impact on the market in the short to medium term cannot be anticipated now.

While Minister Zanganeh called on Opec members to make way for Iran’s return, I do not think Opec will do anything for now. Saudi Arabia may see further production. Lower oil prices will serve its purpose of pressuring non-Opec supplies ... especially US shale oil.

This is why the IEA said — “The bottom of the market may still be ahead.”

 

The writer is former head of the Energy Studies Department at the Opec Secretariat in Vienna.