Oil and the Iran Nuclear Deal
With all the buzz over the Iran nuclear deal being politically debated with great vigor, a very important question if often ignored. How will lifted sanctions effect oil prices? The sanctions imposed by the U.S. stemming from the Tehran Hostage crisis in 1979 have had the goal to punish Iran economically. U.S. trade is prohibited with Iran unless it includes humanitarian efforts to aid the Iranian people. If these sanctions are lifted due to the passage of the Iran Nuclear Deal, there will be a strong effect on the oil prices. Iran, a member of OPEC, holds the second largest oil reserves in the Middle East. It is estimated that the country possess excess inventory of 30 million barrels of crude oil. That is, as soon as sanctions are lifted this inventory will flood an already over saturated market.
This initial release of inventory will not have an immense effect on benchmark prices, due to the massive size of this market, but it serves as a symbol of a steadily increasing supply of oil from Iran. This supply will enact change in that was once non-existent, but now has a very large presence. In 2014 Iran increased its barrel production by 1.6 million barrels per day. This steady increase will continue this year, as production is expected to increase by .6 million barrels per day. This increase will be gradual, however. Iran’s oil ministry main goal is to eventually regain the same market shares held before sanctions were imposed. In a press release they stated, "We will try to maximize our crude export capacity to Europe and restore 42 to 43 percent share in the European market before the sanctions were imposed.” This gradual increase may be due to the fact that that new facilities must be built to accommodate the rising production rate.
A lasting effect on oil prices due to lifted sanctions may be farther down the road. Lastly, Saudi Arabia, the largest oil exporter in the world, may have to cut production to accommodate Iran’s increased market share. Also, Iran will have to compete with other competition through discounting prices. This will contribute to the already struggling market in which prices are hovering around 50 USD/bbl. Overall, an Iran that is allowed to trade freely throughout the world will not help the already saturated oil market.
