New supplies of Iranian oil are set to come online next year at a time when the market is already fairly flooded with crude. When sanctions are lifted as part of the recent nuclear deal with the West, Tehran expects to ramp up production as quickly as possible, but it will be doing so at a time when supply is already far ahead of demand. Bloomberg profiles Iran’s post-deal oil prospects, as well as the effects the new oil will have globally:
[Iranian oil minister Bijan Namdar Zanganeh] has repeatedly said Tehran would increase its production by 1 million barrels a day within weeks of the end of the sanctions, expected to be lifted sometime during the first half of 2016. The IEA estimates that within six months of sanctions ending, Tehran could bring daily production to 3.6 million barrels—or about 800,000 barrels a day above current production. That would mark Iran’s highest level of crude output since 2011. […]
Whatever Iran is able to produce next year, much of its crude could end up in Southern Europe, as Iran aims to regain customers it lost in France, Italy, and Greece. After sanctions forced European countries to stop buying from Iran, Southern Europe turned to Saudi Arabia, Russia, and Iraq as its main suppliers. Analysts say that to take back market share, Iran will have to offer customers cheaper crude than the Saudis and Russians. […]
Zanganeh, Iran’s oil minister, has a message to the rest of the energy world: “Our only responsibility here is attaining our lost share of the market, not protecting prices.”
Whether it’s 500,000 barrels per day (bpd), 800,000, or even 1 million as Iran has predicted, those barrels will contribute to a global supply that already exceeds demand by nearly 2 million bpd. Some of that is already built in to the current price of oil, but depending on how much more oil Tehran is able to sell—and how quickly it manages to do so—we could see oil prices drop further than their already low sub-$50 per barrel levels.
This is excellent news if you’re buying oil—but if you’re a producer, it’s the sort of thing that will keep you awake at night. American shale producers, who are working relatively high-cost fields, are finding ways to streamline processes and innovate new techniques to keep output up even at today’s bargain prices, but those companies won’t relish the further shrinking of already extraordinarily narrow margins. For petrostates, the problem is even more pronounced, as their state budgets and national solvency depend by and large on revenues generated by selling oil. Many of these regimes increased state spending in the wake of the Arab spring as a way of placating a restive populace, and any budget cuts could have a destabilizing effect.
One option would be to cut production and correct the oversupply—historically the strategy of OPEC—but this time around the Saudis don’t seem willing to make that sacrifice for the good of the world’s petrostates—and none of the cartel’s other members can realistically afford to restrict production enough to induce a significant price rebound. Iran, an OPEC member, seems unconcerned by the depressive effect its new supplies will have on prices, and is instead projecting a “make room for us” sort of attitude. If 2015 was a bad year for the global oil market, 2016 promises to be even worse.