TOKYO -- Oil prices are seen sliding even lower as Iran prepares to resume exports and battle for its previous market share when Western economic sanctions are lifted.
The benchmark Brent crude contract closed down $1.75 at $44.06 a barrel Thursday as higher-than-predicted growth in American reserves sparked selling. The market has also begun factoring in a resumption of Iranian oil exports. The International Atomic Energy Agency will make a final report by Dec. 15 on the state of the country's nuclear program. If Iran meets conditions set in its recent nuclear deal with parties including the U.S. and European nations, the long-standing economic sanctions will be lifted, opening the door for shipping more oil overseas.
Raring to go
Iran can raise oil production by 500,000 barrels a day when sanctions end and will return to pre-sanction levels in around six months, Oil Minister Bijan Namdar Zanganeh said. Output could thus climb to around 3.5 million barrels a day as early as mid-2016. Current estimates put the excess global oil supply at a daily 600,000 barrels or so for 2016, assuming U.S. shale oil companies decrease production. But a scale-up of Iranian output could keep that glut above 1 million barrels a day, the same as this year.
"Iran will lower prices to take back its previous market share," predicted Ito Mashino of the Japan Oil, Gas and Metals National Corp. "Saudi Arabia and other exporters will likely fire back, stirring fierce competition." Such conditions could prove dangerous for the Saudis, who the International Monetary Fund believes could exhaust their assets within five years. But many hold that the Iranians can weather the low prices.
"Iran's economy is structured differently from those of other petroleum producers," said Jun Saito, a researcher at the Japan External Trade Organization's Institute of Developing Economies. The oil and gas industries account for less than 20% of Iran's gross domestic product, against roughly 40% in Saudi Arabia. Service industries make up a full 50%. The country has developed its finance, communications and other sectors, cutting its dependence on oil, said Roozbeh Aliabadi of U.S. consultancy Global Growth Advisors. Iranian GDP was as much as 4% higher in 2014 than in 2009.
"The futures curve for Brent crude is growing steeper," Elements Capital CEO Takashi Hayashida noted. A futures curve represents the price of commodities contracts with various delivery dates. When a market is tight, the corresponding curve is relatively gentle. But when the supply-demand balance loosens, sales of near-term contracts tend to spike, making the curve steeper.
"As investors grow more conscious of Iranian oil, investment funds, in particular, are moving to sell near-term contracts," Hayashida said. The Brent market is more sensitive to developments in the Middle East than that for U.S. benchmark West Texas Intermediate crude, and so has been harder hit by expectations of soaring Iranian output. The price of near-term Brent contracts tumbled 24% after the nuclear deal was reached in July. WTI futures dropped only 20%. The curves for both have shifted downward overall since June -- proof that those in the market see low oil prices continuing long-term, an executive at a general trader said.
Offshore oil production in Iran costs $5 to $10 a barrel, according to Roknoddin Javadi, managing director of the National Iranian Oil Co. Producing on land costs even less, he said. Lifting the sanctions will let the country access frozen overseas financial holdings, potentially in the tens of billions of dollars. Iran is thus well-prepared to face off with Saudi Arabia for its share of the market.
If Iran manages sooner than expected to raise output by 1 million barrels a day, oil prices could drop below $40 a barrel, said David Burkart of Coloma Capital Futures. The company is thus leery of increasing its oil holdings.
There is still some question as to whether Western sanctions will fall away smoothly. But a further drop in oil prices seems a very real possibility.