Oil prices that slumped steeply this year might take another hit once a historic deal between the West and Iran allows that country to start pouring more crude into a market brimming with supply.
Many analysts estimate that Iran, OPEC’s fourth-largest oil producer, has piled up tens of millions of barrels on floating barges that can be exported in fairly short order after sanctions have been lifted. The country will follow that with increased production from its oil fields.
When all this happens and how it ultimately affects the price of oil remains far from certain. Energy prices can depend on production levels in other countries, currency rates and demand sparked by the health of global economies. Plus there are questions about the state of Iran’s oil infrastructure and its ability to increase production.
Despite all the uncertainty, analyst Tom Kloza expects the lifting of sanctions to help make energy prices next year “more palatable for most of the world.”
Kloza, global head of energy analysis for the Oil Price Information Service, noted that additional production from Iran would be mixed in with high volumes currently being churned out by Saudi Arabia, Iraq, the U.S. and other oil-producing countries.
“All cylinders right now are just firing for high oil supply, and this just might be the turbo that throws more oil onto the market for 2016,” he said.
Those bulging supplies sent the price of oil plunging from $107 a barrel in June 2014 to a low of about $43 this March. After initially dropping Tuesday on the announcement of the agreement, oil rallied to close up 84 cents at $53.04.
Iran produced about 2.8 million barrels a day last month, but its oil exports have fallen to about 1.1 million barrels since sanctions were enforced in 2012. The country’s oil fields are estimated to be capable of raising daily production to 3.4 million to 3.6 million barrels within months of sanctions being lifted, according to the International Energy Agency’s July oil market report.
Oil industry analyst Blake Fernandez expects Iran’s production to grow gradually, with the country adding about 600,000 barrels a day through 2017. Over the long term, that additional volume might have a more limited impact on price if demand for oil continues to grow by an expected rate of approximately 1 million barrels a day.
“Longer term, we’re going to need those barrels,” the Scotia Howard Weil analyst said.
