Iran may usher a quick return to $50 U.S. oil prices

Negotiations over Iran's nuclear program on March 20, 2015.

The oil market’s mostly focused on U.S. supply data this week, but next week should be all about Iran and the deadline for a final agreement over its nuclear program.

If a deal between Iran and six world powers is reached by the June 30 deadline, Iran could soon start dumping millions of barrels of oil into the global market, ushering a quick return of $50 oil prices.

“Iran has at least 34 large tankers full of oil — about 50 million barrels or more — ready to “sell and sail” if sanctions are lifted, said Byron King, editor of investment newsletter Outstanding Investments.

Iran’s oil in floating storage is ‘a massive distortion waiting to hit markets as soon as it’s legal.’ <cite>Byron King, Outstanding Investments</cite>

He said some of that may have been pre-sold or deals may have already been wired, but “that’s a massive distortion waiting to hit markets as soon as it’s legal.”

Analysts debate over just how much oil Iran has in floating storage, but all agree that the oil can have an immediate impact on the global market.

Michael Lynch, president of Strategic Energy & Economic Research, said the amount may be more like 30 million to 40 million in storage, but it “could hit the market very quickly.”

Even if sanctions on Iran are not lifted right away, some buyers, such as India and China, may “assume that enforcement will be lax,” he said. “So traders are likely to give a small bump downward in oil prices, probably by $5 a barrel, and then wait to see what happens.”

That could happen within about a week following an agreement, he said.

And “if Gulf exporters suddenly find their market weakening because Iran has unloaded its stored oil, they might offer discounts and keep prices for [West Texas Intermediate crude] in the $50-$55 range,” said Lynch.

Crude oil for August delivery CLQ5, +0.23%  settled Tuesday at $61.01 a barrel on the New York Mercantile Exchange. Prices haven’t traded close to the $50 level since early April.

Meanwhile, Saudi Arabia, which has been pumping more than 10 million barrels of oil a day with no signs of a slowdown, probably will not cut back to make room for Iranian oil, said James Williams, an energy economist at WTRG Economics.

Saudi Arabia, the top producer in the Organization of the Petroleum Exporting Countries, has made it clear that it has no plans to slow production, as it continues to battle non-OPEC producers for market share.

Against that backdrop, Williams sees oil prices falling by $5 to $10 a barrel — and possibly by more in the short term if the Iranians dump the oil it has in storage in tankers, he said.

<cite>U.S. Energy Information Administration</cite>

 

Iran’s crude-oil output fell to 2.7 million barrels a day in 2013 due to sanctions.

But looking further ahead, analysts aren’t quite sure just how much or how quickly Iran can boost its oil production.

Newsletter editor King said it’ll take “several years” for Iran to “get the investment pipeline back into shape for its internal industry.”

But Lynch said returning to the pre-sanctions production level, which is roughly an extra 1 million barrels a day, “should only take six months or so — as they acquire parts and some advice.”

“Real, major increases in production are likely in the long term, but whether they will prove more adept than the Iraqis at moving forward isn’t clear yet,” Lynch said.