Countdown to June 30: Iran could be game changer

World powers including Russia and the US plan to complete talks with Iran to end the impasse over its atomic program.

With the June 30 deadline approaching for the deal with Iran, which could ease the economic sanctions that have shriveled its oil exports for at least the past three years, the historic deal with Iran over its nuclear programme is now within reach. The global market for crude oil will inevitably take notice of how the deal affects Iran’s oil exports.

Over the past two years, under continuous pressure from international sanctions, Iran has been unable to find new customers for its oil, while existing buyers were forced to reduce their purchases by 10 percent to 20 percent every six months. As a result, Iran’s daily exports declined.

Iran has at least 30 million barrels in storage that could be exported this year if sanctions are lifted, and it may add 500,000 barrels a day to global inventories by the end of next year, the US Energy Information Administration estimates. The US could export more than 1 million barrels a day if the ban were lifted, EIA administrator Adam Sieminski said.

In late 2011, before the most recent round of international sanctions, Iran produced 3.6 million barrels of crude a day, according to the US Energy Information Administration. By early last year, Iran’s daily exports fell to an average of 1.4 million barrels a day, with China and India among the buyers, according to EIA’s latest data.

OPEC should “coordinate itself”

Bijan Zanganeh, Iran’s oil minister has said Organization of Petroleum Exporting Countries (OPEC) will “coordinate itself” to accommodate Iran’s return to oil markets without causing a price crash. Iran, once the number 2 exporter of OPEC, is looking to ramp up its crude oil exports quickly if a final agreement is reached with the six world powers over its nuclear programme, and sanctions are lifted.

However, it is unlikely that other OPEC members will easily accommodate Iran’s demand to restore its share of OPEC production to pre-sanction levels.

Other OPEC members are growing share of output as the fight for market share rages on. The only OPEC member that could realistically scale back its output in response to higher output by Iran and other members is Saudi Arabia. However, geopolitical tensions between Iran and Saudi Arabia have escalated since 2011. They have engaged in proxy wars against each other in Lebanon, Syria, and Iraq. Thus, any OPEC negotiations for realignment of the member in the event of the return of Iranian crude are likely to be contentious, and it will be very difficult for members to reach an agreement. Hence it is likely that as Iran increases its export volume once sanctions are lifted, the aggregate OPEC output will increase as well. OPEC overproduction might even worsen if Saudi Arabia decides to harm Iran’s oil revenues by flooding the market and reducing the price of crude oil.

Iranian oil export may mean prolonged US export ban

Should Iran strike a deal with the US and five other nations in the coming weeks to limit its nuclear program, more Iranian oil could flow onto the market as sanctions are eased. Iranian producers will then be freer to sell oil and this could prolong US quest to export its own crude.

“If Iranian oil sanctions are lifted, it imposes sanctions on US oil producers if we keep the oil export ban in place,” Senator Lisa Murkowski, an Alaska Republican who’s become the chief advocate for lifting limits, said.

The oil companies in their lobbying have shifted their arguments to link exports to national security and US geopolitical influence and are downplaying the effect on gasoline prices, the issue that has made some members of congress wary.

However, there is a counter argument. US crude is not necessarily a substitute for Iranian oil. Iranian crude on average is heavier and more sulfuric than the US version. Iran more likely would compete with Iraq and Saudi Arabia to serve Asia’s demand for medium-grade crude, he said. By contrast, US crude would probably find a home in Latin America, Europe and or at Asian refineries that can process the lighter variety.

Oil producers have idled hundreds of US rigs and slashed thousands of jobs in the past year to contend with falling prices in the world oil markets.

EIA forecasts US crude production will average 9.4 million barrels a day in 2015.

FRANK UZUEGBUNAM