Commodities | Apr 09 2015
-Final agreement still fragile
-Arab response key to outlook
-Pressure on crude for longer
By Eva Brocklehurst
A long series of negotiations between Iran and the five permanent members of the UN Security Council, plus Germany, came to a watershed last week with a framework agreement. Iran is the world's sixth largest producer of oil and has the world's fourth largest reserves of oil and the largest reserves of gas. An accord on sanctions could have a significant impact on the energy outlook for the years ahead.
The news prompted a sharp decline in crude pricing, as traders feared Iran may dump oil from storage and its under-utilised producing assets. JP Morgan observes these fears quickly subsided as the precise timing of the lifting of sanctions was debated while the accord remains fragile. Adding to the confusion was news that Saudi Arabia had increased the official crude selling price to Asia for a second time. Notwithstanding this, JP Morgan envisages the risk of increased Iranian and Libyan supply coming to market will support a cautious outlook for near-term crude prices.
There remains some way to go as there appears to be differences between the fact sheets published by Iran and the US, in Deutsche Bank's observation. The schedule by which some sanctions may be lifted, the timetable and reduction in enriched uranium stockpiles, and the nature of the modifications to the Arak heavy water reactor are among these issues. Deutsche Bank is cautious about whether these differences can be bridged and whether a final agreement can be signed off in June.
In the event of an agreement, the broker expects incremental Iranian oil production growth may be 400,000 barrels per day by mid 2016 and an additional 400,000 b/d beyond and through to 2020. The scale and timing of any supply increase will depend on the timing of Iran's compliance with the agreement and the verification process, as well as the physical capability to increase production. There is also the response from the Organisation of Petroleum Exporting Countries (OPEC) to be considered. Given the uncertainties, Deutsche Bank leaves oil price forecasts unchanged, noting downside risks to 2016 and beyond.
Macquarie concurs, assessing that the response by Arab producers to an Iranian deal may be as important and bearish a factor as the direct effect of rising Iranian exports. If sanctions are fully lifted during the northern summer the implications are that Iran would be able to grow production and exports by 300-400,000 b/d within a few weeks. The country has roughly 30m barrels in floating storage, which could add another 300,000 b/d over the first three to four months after a deal is approved. Arab OPEC members would be unlikely, in the broker's view, to give up market share to accommodate Iran's production growth, creating another negative supply side dynamic for medium-term oil prices.
The progress on an agreement surprised Macquarie, which held a belief that Iran would, under no circumstances, agree to give up its nuclear ambitions. The implications for the market is that a price recovery will be delayed and a final deal will add the supply equivalent of an entire year of global oil demand growth. It would be bullish for West Texas Intermediate versus Brent, with Brent more likely to sustain downward price pressure, in the broker's opinion.
Western energy industries would probably, in the event of a signed agreement, be able to re-enter Iran and aid in further production capacity expansion, Citi maintains. Development costs in Iran are at the low end of the global cost curve and additional export capacity would reduce the need for investment in marginal conventional, deep water oil and shale.
Given the higher capex intensity of these assets, expansion of Iranian production would be a negative for the global oil services industry. Citi does not expect expansion of Iranian exports would end a recovery in shale services but would temper it. The winners from the opening up of Iran would be European E&C contractors, in the broker's view. Those which already have a material presence onshore in the Middle East.
Morgan Stanley accepts crude could be facing a supply headwind, but not from Iran. The broker believes Iraq and Libya are greater risks. Iraq appears to be making up for weather-related loading backlog, with exports up 15% in March to the highest in 35 years. Recent numbers also reveal Libya has doubled its exports from just two months ago, with talk of lifting the force majeure at two major eastern ports.
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