Return of Iranian oil may cause more OPEC tensions

| JULY 19, 2015, 12:00 AM IST

The return of oil from Iran following the landmark nuclear energy deal with world powers could create fresh tensions within OPEC but may reinforce the cartel's output strategy, analysts say. Tehran and major powers -- Britain, China, France, Germany, Russia and the United States -- clinched a historic agreement in Vienna aimed at ensuring Iran does not obtain a nuclear bomb, and which paves the way for the removal of sanctions and the gradual return of Iranian oil to the global market next year.

The accord puts strict limits on Iran's nuclear activities for at least a decade. In return, sanctions that have slashed the oil exports of OPEC's fifth-largest producer will be lifted and billions of dollars in frozen assets unblocked. The Islamic republic's exports could reach a potential 2.4 million barrels per day (bpd) in 2016, from 1.6 million bpd in 2014, according to data from economist Charles Robertson at investment bank Renaissance Capital. The Organization of the Petroleum Exporting Countries -- whose 12 members including Iran pump one third of global oil -- is mindful that Iranian oil could worsen a global supply glut and depress oil prices further. OPEC decided at its last meeting in Vienna in June to maintain output levels, extending its Saudi-backed strategy to preserve market share and fend off competition from booming US shale.

Poorer OPEC members Angola, Algeria and Venezuela -- whose budgets are heavily reliant on oil revenues -- may again argue for less output to support prices, analysts say. Richer Gulf producers, led by OPEC kingpin Saudi Arabia, remain eager for the cartel to preserve valuable market share and force out high-cost US shale producers with lower oil price levels.

In June, OPEC's collective output ceiling was left at 30 million bpd -- where it has stood for three and a half years -- despite an oil price collapse between June 2014 and January that slashed precious revenues.

The organisation appeared to shrug off calls from some members, including Iran, for a "reasonable" oil price of between $75 and $80 per barrel. Oil is forecast to languish at an average of just above $62 per barrel next year, according to French bank Natixis. Ann-Louise Hittle at consultancy Wood Mackenzie cautioned that low price levels could slow down US shale energy production and make room for returning supplies from Iran -- provided that global energy demand does not falter.

"When we look at fundamentals (of supply and demand) in the next year, with prices at this level we do expect to see a much slower growth in US oil supply," she said. "So there might actually be some room for Iranian production to start up, as long as oil demand growth holds up and continues."

Share this