Iran Nuclear Deal Likely To Cause Sustained Drop In Oil Prices

Terrible days lie ahead for oil exporters after the Iran nuclear deal opened the world to additional oil supplies from the oil rich country. Already blessed with some of the deepest oil reserves in the world, Iran’s comeback in the oil market will further tilt oil prices downward, spelling liquidity problems for exporters and greater travel options for end consumers.

Oil prices dipped on Wednesday after the news of the Iran nuclear deal hit the wires. The deal would see decades old sanctions imposed by the U.S., the E.U. and the UN, against the Middle East country eased in exchange for curbing their nuclear program. The sanctions effectively locked out a key player from international oil markets, crippling the country’s export capability and gradually reducing its contribution from over 4 million barrels per day (bpd) at its peak to only 1 million bpd.

With the sanctions lifted, oil prices face an inevitable widening glut that will most certainly mean a negative price hit and in turn a positive boost to the global economy. Officials from the National Iranian Oil Company reported that Iran’s oil would see an increased production up to 600,000 bpd, confirming an oncoming supply ramp-up. Adding to the report, officials expressed optimism that the country could hit its initial pre-sanctions 4 million bpd if demand were present. For oil marketers, such news could not have come at a worse time.

Already, without a vibrant Iranian supply, the international markets are oversupplied by 2 million bpd thanks to an increased production by Russia, Iraq and the Organization of the Petroleum Exporting Countries (OPEC). Economic problems in China, one of the largest energy consumers in the world, have only served to bring down demand, lending dominance to the economics of the free market and sending oil prices to record lows.

A deal with Iran would mark the entrance of a powerful player starved of a piece of the international market and more than eager to compensate for their years of absence. The markets would definitely immediately respond to the news, and they did.

Brent crude went down 50 cents by 1104 Wednesday to close at $58.01 a barrel while U.S. oil futures fell 35 cents to close at $52.69.

Analysts agree that Iran’s oil could reach the market by early 2016. Goldman Sachs analysts estimated Iran’s supply at an additional 200,000-400,000 bpd at the start of 2016, together with the release of an additional 20-40 million barrels in floating storage. In a note to clients, the firm stated, “We view the 2016 prospects for higher OPEC production, including from Iran, as a growing downside risk to our oil price forecast.”

As analysts predict a ballooning oil production glut, marketers brace for tougher times ahead. A fierce battle for the oil importing consumers will see prices plummet, benefitting countries which have long been exploited by unreasonably high oil pricing.

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