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Crude Economics
OPEC Braces For New Reality

This week’s nuclear deal between the West and Iran could heighten tensions within OPEC as Tehran prepares to boost its exports in a global market that’s already oversupplied.

Western sanctions cut Iranian oil exports nearly in half in just a few years, and Tehran is already¬†on record as saying it’s prepared to increase sales by as much as one million barrels of oil per day once those sanctions are lifted. The country hopes to raise total exports above 5 million barrels per day (bpd) by the end of the decade. Analysts think that’s an overly optimistic outlook, and after a brief dip yesterday oil prices ticked upwards as traders reacted to the fact that sanctions haven’t yet been lifted. There’s no clear timeline for when they will be, and therefore for when Iran might once again ply its crude in Western markets.

But while questions remain over how much more oil Iran will be able to export, and by when they’ll be able to do it, OPEC still has to start preparing for another¬†one of its members to increase production in a bear market, as Reuters reports. The cartel is hoping that demand, which has been tepid this last year on weak growth in Asia and Europe, will tick upwards again and help to absorb new Iranian supplies. Time will tell if that bet pays off.

While historically OPEC has cut production in times of oversupply as a way to keep prices high, this time around it’s chosen to sit tight and try to squeeze out non-OPEC producers for market share. But shale’s resilience is throwing a wrench in that plan, and a flood of new Iranian crude looms ominously on the horizon. Saudi Arabia is the only realistic candidate capable of cutting production to make room for Iran, but it’s hard to imagine Riyadh willingly doing that for its regional rival.

What we’re left with are some strong long-term forces acting to keep the global oil supply booming, likely ensuring cheap prices for the foreseeable future. For producers like OPEC’s petrostates or American fracking firms, that could be a big problem. For everyone else, well, it’s a buyer’s market.

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  • http://www.librarything.com/profile/Bretzky1 Brett Champion

    Iranian oil is going to start coming back on the market in a big way next year regardless of what happens with the nuclear deal. Either the deal goes through and Iran starts “legally” exporting large amounts of oil again, or Congress kills the deal, in which case the international sanctions regime collapses with the rest of the world blaming the US and diving back into Iran (which would have happened anyway had the US not agreed to even what most independent observers would have labeled a bad deal for the US).

    The only question is to what extent Western technology is going to be put to use by Iran in upgrading its oil infrastructure, or does that business go to Russia/China.

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