Crude Estimate: How Ending Iran Sanctions May Impact Oil Markets

Anticipation that a nuclear deal with Iran was imminent – and that it would ease international sanctions on the country's oil and gas sectors – briefly dropped crude oil prices to new lows Monday.
The country holds the fourth-largest oil reserves in the world, and it is sitting on another 20 to 40 million barrels in storage on-shore and in more than a dozen tankers floating off its coast – oil that could immediately flood a market already awash in cheap crude if and when sanctions are lifted.

But any major change in price may come not from that influx of oil, but the fears of shaky investors.
"You will probably see the greatest price response before any oil barrels actually flow, similar to what you had when the barrels from Iran were taken off the market," says Jamie Webster, senior director at the consulting firm IHS.

Nonetheless, he adds, "This is quite bearish obviously for oil markets. We're still in a very oversupplied situation."
Just about every aspect of the potential deal remains unclear, from the conditions Iran might have to meet to satisfy American negotiators that it had slowed its development of a nuclear weapon, to how swiftly sanctions might be lifted. Even the timing of the agreement grew less certain Monday, as hopes for an announcement Tuesday fell then rose again through the day.
Still, experts agree some outcomes are more likely than others:

1. Foghat had it right.It will likely be a slow ride for oil and gas sanctions, which experts say probably will not be lifted immediately or all at once.
"It should be phased in over time," says Steven Kopits, managing director of Princeton Energy Advisors, a consulting firm. "What I understand is there's a verification period for the nuclear program, and then sanctions lifting in the first half of 2016."

2. So did the Eagles.
Even if sanctions were relaxed as soon as a deal was announced, the Iranian oil sector will have to take it easy as it ramps up production. While international sanctions have not completely stopped Iran from exporting oil – China and India have remained customers – dozens of its wells were mothballed due to lack of demand. Getting them back up to speed will take time and money.
"There's been some damage to Iran's oil fields from the shuttered production – there's going to need to be investment," says Ann-Louise Hittle, lead oil market analyst for Wood Mackenzie.

Jan Kalicki, public policy fellow and energy lead at the Woodrow Wilson Center, agrees.
"It would have to rehab the oil wells," he says. "It has huge potential, but to realize that potential, it will need to invest many billions of dollars into the oil fields."

3. But if and when sanctions do end, Iran has every reason to take the money and run
The international crackdown has left Iran starved for cash. Even while oil prices hover near four-year lows – a result of the U.S. fracking boom that's flooded the market with cheap oil – the country's leaders will likely aim to increase production as quickly as possible.
"They need the cash and they will accept whatever low price is the result of that," Kalicki says. "The Iranians will want to do everything they can to export oil as quickly as possible."
There's also huge demand for foreign investment, both in terms of money and innovation.
"What they can really use is a lot of Western technology in the oilfields," says Mike Dyson, a director at Navigant Energy, a consulting firm. "That will make a big difference in their ability to ramp up production, as well as investment money."
And that ramp-up is what will allow Iran to elbow its way back into the international market, giving it the ability to provide oil to clients as reliably and as cheaply as possible.
"The likelihood is there will be a race for market share," Kalicki says.

4. That said, prices for crude and for gasoline won't exactly free fall.Iran's oil minister pledged to increase the country's exports by roughly 1 million barrels per day within a year. Experts, Kalicki included, estimate the process will take a bit longer, but that the numbers are about right in the long run.
Worldwide, countries produce about 100 million barrels of crude per day.

"Whatever the number, given the overall oil system, it's a small amount, but it does have an impact on the markets because there's already an oversupply of oil in the marketplace," Kalicki says.
Consumers and shipping companies would see a benefit, as the influx of oil helps suppress gasoline and diesel prices.
"It would at least bring prices at the pump slightly down," Webster, of IHS, says.
Meanwhile, the U.S. oil and gas sector, which already laid off tens of thousands of workers when oil prices plummeted last fall, would not be greatly affected.
"U.S. production has been extremely resilient, even in this low price environment," Webster says.
As Tom Petty would have put it, the waiting is the hardest part.