Market Braces for Iranian Crude
Traders are expecting an end to United Nations' sanctions on Iran this weekend, if UN inspectors verify local officials’ claims that the core of the Arak nuclear reactor has been put beyond use.
The positive outcome of this long-awaited inspection has been taken as read since before the July 2015 decision to lift sanctions on Iran. But the lifting remains subject to certain other conditions, including the threat of ‘snap-back' – ie their prompt reinstatement if Iran changes its behaviour. And US investors will be wary of the legal risks of investing in Iran.
The removal of sanctions could lead to another 500,000 b/d of extra crude on the market, either immediately or building up to that amount over the next six months, depending on one's analysis of Iran's capacity. Iran itself has put the figure at 1mn b/d. That is without counting the millions of barrels of Iranian crude that are stored and waiting to go.
Even if only 100,000 b/d of new production makes it in the first few months, as neglected infrastructure creaks slowly back into action, the omens are not good for sellers, and this week has seen banks coming out with increasingly severe forecasts. Standard Chartered said that $10/b is the real floor; while the Kremlin's economists have reportedly been studying how Russia's already battered economy would look if oil were somewhere below $25/b.
Russian crude exports are going to be lower this year, providing a glimmer of hope. Based on capacity bookings, pipeline operator Transneft will export 215.8mn mt this year, compared with 229.6mn mt last year, it told journalists earlier this week. Brent crude futures for delivery in February and March closed at $31/b January 14.
In the wake of low oil prices come low long-term gas contract prices and billions more dollars of upstream projects are shelved, risking an even larger shortfall in oil and gas supply later this decade.
Sanctions lawyer cautions investors
Iranian sanctions lawyer Sarosh Zaiwalla commented January 15 that Iran’s re-engagement with international markets was supported by new legislation designed to attract more investors, even allowing them to register wholly-owned foreign entities. “This is a particularly important development for the energy sector, in which Iran is hoping to attract $30bn of foreign investment to help realise its ambitions to increase oil production,” he said.
“It is important to note, however, that Iran is subject to a “snapback” re-imposition of the terminated sanctions in the event of significant non-performance of its Joint Comprehensive Plan Of Action commitments. Additionally, the majority of US sanctions preventing US persons from conducting transactions in Iran remain in place and businesses must ensure they comply with all applicable sanctions to prevent problems.”