A gas flare on an oil production platform can be seen next to an Iranian flag in the Gulf.
Raheb Homavandi | Reuters
The return of the Iran nuclear deal would be imminent – and with it the return of much oil to international crude markets.
Before the US resumed sanctions against Iran after former President Donald Trump left the deal in 2018, Iran was the third largest producer in OPEC after Saudi Arabia and Iraq. In 2017, it was the fourth largest oil producer in the world after the US, Saudi Arabia and Russia.
“OPEC could easily produce 30.5 million barrels per day if Iran comes back and those barrels are not accommodated,” Tamas Varga, an analyst at PVM Oil Associates in London, told CNBC on Tuesday. “In this scenario, my model shows Brent falling to $65” a barrel in the second half of 2023, Varga said.
That’s a huge drop from the current price of Brent oil, which traded at just over $101 a barrel in New York Tuesday morning.
Last week, Saudi Arabia’s Energy Minister Prince Abdulaziz bin Salman warned OPEC could be forced to cut oil production. The minister’s reasoning was that the physical and paper markets are “decoupled” from the latter suffering from “very low liquidity, extreme volatility,” he said in an interview with Bloomberg last week.
But Iran’s potential re-emergence in the market is also likely to be a concern, analysts say.
“OPEC+ may be preparing for Iran’s eventual return,” Varga wrote in a report on Tuesday. “If the nuclear deal is revived, an additional 1-2 million barrels of oil per day could hit the market in a relatively short period of time.”
And veteran OPEC analyst Helima Croft, head of global commodities strategy at RBC Capital Markets, told the Financial Times last week that “I think earlier this year it’s fair to say that Saudi Arabia and other regional actors are pretty sure were that the deal with Iran would not go through.” will happen in the near future… Now that the negotiations have been revived, I think they will focus on both the oil market and the broader security implications of this deal potentially coming to a close.”
But will there be a deal?
Iranian negotiators expressed optimism about the prospects for an agreement in mid-August, with an adviser saying that “we are closer than before” to closing a deal and that “the remaining issues are not very difficult to resolve”.
But so far it seems that there are still a few bottlenecks that are quite difficult to solve. The main point of contention between the Iranian and Western camps is an ongoing investigation by the International Atomic Energy Agency – the UN’s nuclear watchdog – into unexplained traces of uranium found in Iranian facilities in the early 2000s. Tehran wants the investigation closed before accepting a deal; the IAEA and the US and European governments have so far refused.
The nuclear deal, formally called the Joint Comprehensive Plan of Action and written under the Obama administration along with France, the UK, Germany, Russia and China, lifted economic sanctions against Iran in exchange for restrictions on its nuclear program.
However, since the US withdrawal in mid-2018, sanctions have crushed Iran’s economy of 84 million people and Tehran has gradually ramped up its nuclear activity in violation of the deal, enriching uranium to the highest level it has ever enriched and of the IAEA warns that “only countries that make bombs” show this level of activity.
That means there’s a lot at stake, especially for the Biden administration, which cited the deal’s revival as a key foreign policy goal. It has also become more urgent as sanctions against Russia over the invasion of Ukraine reduce Europe’s oil and gas supplies and push prices up. While Iranian oil wouldn’t fully offset the loss of Russian barrels, it would help ease supply pressures, analysts say.
“A deal with Iran would represent an additional 1.1 to 1.2 million barrels per day in crude oil exports, production and exports. That would happen in the next eight months. So we would have a material difference on the balance sheets globally,” said Reid l’Anson, senior commodities analyst at commodity data company Kpler.
But l’Anson doubts the chances of a deal being reached, and he’s not alone.
“The question going forward is whether we will actually see a deal,” he said. “I still think we probably won’t do that alone, given that it’s politically unpopular in America and even Iran.”
Bob McNally, president of Rapidan Energy Group, was more optimistic.
“We think a deal is likely; we think it’s always been very close and it’s getting much closer,” he said.
“Iran has about 150 to 200 million barrels of crude oil and condensate floating on the water. Once the deal is done… you’re going to have a rush on those sales of stored oil,” he said, estimating Iran would increase its production by about 900,000 barrels per day.
That means a significant increase from the current production level of about 30 million barrels per day, unless OPEC members significantly cut their oil production. “That’s something OPEC and OPEC plus need to consider when they think about oil supply policy,” McNally said.
Given the recent comments from the Saudi energy minister, it seems the group is definitely thinking about it. But the longer the Iran deal negotiations stall over points of contention, the longer OPEC has to prepare — assuming a deal is reached at all.